Figure 1: Real GDP growth (S)

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

Mozambique’s growth rate surged to 8.1% in 2010, supported by the gradual recovery of aluminium prices, public investment and FDI inflows. The economy had already proved strongly resilient to the global economic crisis in 2009, despite the sharp 35.7% decrease in aluminium prices, thanks to the USD 600 million investment in the Moatize coal mega-projects, which accounted for more than half of FDI. Growth rates will be slightly lower in 2011-12 than in 2010 but will remain healthy, driven by private consumption, public investment financed through non-concessional loans, private investment addressing huge infrastructure deficits in transport and energy, and the beginning of coal exports.

In 2010, agriculture continued to be the largest driver of GDP growth, followed by transport and communications, commerce and financial services. Manufacturing and tourism still lag behind.

Mozambique is seeking to diversify agricultural exports, currently limited to cashew nuts and cotton, and to promote the processing of raw materials. Agriculture production suffered from poor weather conditions in 2009 and 2010. High food prices in 2008 prompted the government to launch the 2008-11 Action Plan for Food Production, which seeks to ease reliance on imports. The plan has had only a moderate impact to date, however. Funding for the plan will amount to 1.3 billion Mozambican meticals (MZN) in 2011, and another MZN 2 billion will be allocated for food production at the local level. This programme builds on the 15-year Green Revolution Strategy approved in 2007, whose weak implementation has resulted in the phasing out of donor support.

Mineral prospects have sustained FDI inflows in spite of the global crisis, and Mozambique is expected to become the continent’s second-largest coal producer after South Africa. The USD 1 billion Benga coal project, a joint venture between Australia’s Riversdale (65%) and India’s Tata Steel Limited (35%), is expected to be completed in the second half of 2011; reserves are estimated at 4 billion tonnes. The USD 2 billion Zambezia Project, adjacent to the Benga mine, will exploit 9 billion tonnes of coal reserves. In June 2010, the Zambezia project became a joint venture between Riversdale (60%), Wuhan Iron and Steel Corporation, and China Communications Construction Company (the latter two have a joint holding of 40%). The government is seeking to acquire 5% of both the Benga and Zambezia projects. In addition, the USD 1.3 billion coal project in Tete developed by Brazil’s Vale will produce an annual 8.5 million tonnes of metallurgical coal and 2.5 million tonnes of thermal coal. In addition to these coal projects, the US firm Anadarko has discovered oil deposits offshore of northern Mozambique, although it is unclear whether the find will prove commercially viable.

Mining projects are generating investment in the transport and communications sectors, which will continue to be the second-largest source of economic growth after agriculture up to 2012. The Moatize-Beira railway between Tete province and the port of Beira will be operational in 2011. The 670 km line was rehabilitated by CCFB Consortium at a total cost of USD 260 million, of which USD 110 million was lent by the World Bank. CCFB is a joint venture between the state-owned Companhia de Ferros de Mocambique (49%), the state-owned Rail India Technical and Economic Services (26%) and Indian Railway Construction International (25%). The Moatize-Beira railway, with an annual capacity of 6 million tonnes, will be insufficient to transport the combined maximum production of 50 million tonnes from the Benga and Zambezia projects and Vale’s operation in Moatize. The railway’s limited capacity, together with the high prices set by CCFB, are motivating mining companies to build alternative railway lines.

A tender was issued for a coal terminal with a capacity of 21 million tonnes for the Beira port, since the old terminal’s capacity of 1.2 million tonnes will meet only a fraction of the demand generated by the new coal projects in 2011. The port is also being rehabilitated with funds from Japan International Cooperation Agency.

Works in the USD 120 million Nacala airport started in 2011, supported by Brazil’s USD 80 million non-concessional line of credit. The airport will play a key role in the USD 1.5 billion Nacala SEZ. The corridors linking the ports of Beira and Maputo to Zimbabwe are being finalised with the rehabilitation of the roads between Beira and Inchope (120 km) and between Gaza and Maputo (170 km). The corridors will connect areas with tourism and agricultural potential.

As part of the country’s new growth strategy, the government is also promoting PPPs to develop transport in the development corridors. A railway link between Moatize and Nacala as well as the upgrade of the Nacala port are in the pipeline, at an estimated cost of USD 2 billion.

Energy and water will have contributed an annual 0.5% to GDP growth in 2009-12. The rural electrification programme continues to advance, supported by a USD 25 million line of credit from India. Construction of the USD 1.8 billion Mpanda Nkuwa dam has started, and the USD 413 million expansion of the Cahora Bassa hydroelectric dam is under way. Moreover, Portugal’s remaining 15% stake in the Cahora Bassa dam is to be sold to Mozambique in 2011 for USD 140 million. The transmission line between the Cahora Bassa dam and Maputo, now under construction, should reduce the country’s reliance on reimported electricity from South Africa.

Manufacturing remains largely linked to mega-projects such as the Mozal aluminium plant and the Moma heavy sands mine. Most national firms are unable to deliver the required outputs, however, and the IFZs are dominated by foreign companies. The government is creating two new IFZs in Nacala’s SEZ, the first of which will be operational in the first quarter of 2011. Five more IFZs and an additional SEZ are to be completed before 2014, in areas to be identified on the basis of foreign investors’ interest.

Tourism continues to be dominated by South African, Portuguese and US investors. The Arco Norte project in Nampula, Cabo Delgado and Niasse provinces and the Âncora project in Nampula and Inhambane provinces will boost dynamism in a sector that is benefiting from both international and domestic demand.

Economic growth continued to be supported by private investment, which increased by 66.3% in 2010, following a 109% increase in 2009. FDI into mega-projects, notably the coal mines in Tete province, account for most of that expansion. In addition, the Public Investment Programme grew by 23.9%. Following a 14.9% contraction in 2009, exports also recovered with a 24.6% rise, driven by higher aluminium prices. Over the 2010-12 period, public consumption is expected to grow at a slower pace, due to the revision of salaries to match skills and performance. In 2011 and 2012, growth will be sustained mainly by private consumption, public investment in infrastructure financed through non-concessional loans, and coal exports. The annual growth of private investment will fall below 20% in 2011 and 2012. The main risk in the growth forecast is that the recovery of international oil and food prices and poor weather will result in failure to control inflation.

Figures for 2010 are estimates; for 2011 and later are projections.

Inflation accelerated to double digits in 2010, due to rising international food and oil prices and the phasing out of fuel subsidies between March and August 2010. In addition, the metical depreciated by more than 30% in nominal terms against the currencies of major trading partners between January and July 2010, reflecting a recovering US dollar and a stronger South African rand. Donors’ suspension of budget support until September 2010 also contributed to the depreciation of the metical during the first half of the year. The depreciation had only a minor impact on exports, owing to supply constraints, but the rising cost of imports penalised sectors that rely on foreign goods, with construction firms being particularly affected.

The supply of fruit and vegetables was also scarce following a poor agriculture year, and an unusual concentration of fuel imports in July-August 2010 further contributed to price increases. Water tariffs rose by 20% in the first five months of 2010, followed by another increase in September 2010, and electricity tariffs rose by 7.5% in September 2010. Lastly, loose monetary policies introduced to counteract the global crisis resulted in a 56% increase in credit and in the overheating of the economy by June 2010.

Faced with accelerating inflation and a depreciating metical, Banco de Mocambique (BM) raised interest rates on the standing lending facility from 12.5% in April 2010 to 16.5% in February 2011 and on the standing deposit facility from 3% at end-2009 to 5% in February 2011. The central bank also increased the legal reserve requirements for banks from 8% at end-2009 to 9% in February 2011. BM’s restrictive measures resulted in higher interest rates and shorter-maturity loans for commercial banks’ customers: the average annual interest rate charged on bank loans was 21.26% in 2010.

BM’s intervention in the interbank market – it sold USD 70.3 million in foreign exchange in November, up from USD 50.5 million in October – caused the metical to appreciate in late 2010. Meanwhile, treasury bills worth USD 52.8 million were issued on the interbank money market in November. These measures improved access to foreign currency for purchases of imports, particularly fuel.

The government expects inflation to decelerate to single digits in 2011, thanks to improved domestic food production, the stabilisation in international commodity prices and the extension of the urban transport and wheat flour price subsidies. The exchange rate is also expected to stabilise in 2011-12, due to a restrictive monetary policy and a new regulation approved in 2010 that will come into force in 2012: exporters will have to convert at least 50% of sales proceeds into meticals within the 50 days following a transaction. On the other hand, the persistent expansion of the domestic money supply beyond the economy’s productive capacity constitutes a major risk to the improving outlook for inflation and the exchange rate.

The current account deficit widened slightly to 11.2% of GDP in 2010, despite the improvement in the trade balance, due to a 5.7% rise in food and oil imports and a decrease in factor income. Average prices of key imports increased, particularly those of maize (up 41%), wheat (35.9%) and oil (14.2%), following a deflationary period in 2009.

Exports picked up by 27.2%, following a drop in 2009 due primarily to a decline in aluminium prices. This recovery was sustained by a gradual improvement in the aluminium sector, where prices rose by 14.8% in 2010. The recovery in non-mega-project exports was sluggish in aggregate terms, however, despite the price rises in cotton (89.5%) and sugar (16.1%). Mega-projects accounted for 75% of exports and 20% of imports in 2010.

Exports will increase further in 2011, boosted by the expected 10.4% rise in aluminium prices and the contribution of the coal mega-projects. Accelerating food and oil price indexes are expected to raise the import bill. The current account balance will remain structurally negative in 2012 and thereafter, however, due to the dependence on imports of food, oil and manufactured products.

After an increase in aid inflows to 16% of GDP in 2009, this contribution is expected to decline gradually over the 2010-15 period. While project support should remain stable at 7.8% of GDP, budget support will steadily decrease from 9% of GDP in 2010 with the gradual phasing out of some donors’ contributions after the controversial 2009 elections.

Despite the global downturn, net FDI inflows rose from USD 587 million in 2008 to USD 878 million in 2009 and USD 917 million in 2010 (a figure roughly equivalent to the USD 895.2 million in foreign grants received in 2010), primarily as a result of coal mega-projects. The government will almost double net non-concessional foreign borrowing, though remaining under the USD 900 million annual ceiling, over the 2011-14 period compared to 2008-09, in order to fund massive infrastructure programmes under PPP arrangements. While the debt service to exports ratio remains well below the 20% threshold, the present value of debt to GDP could exceed the 40% limit set by the International Monetary Fund (IMF) in the event of an extreme shock within the 2011-20 horizon.

Following the 30th Southern African Development Community (SADC) summit in August 2010, the launch of the SADC customs union, originally planned for 2010, was postponed to 2012 to allow further study of the impact of such a reform on member states. The SADC member states nonetheless reaffirmed their commitment to set up a monetary union in 2016. In 2010, Mozambique continued to remove tariff and non-tariff barriers and to harmonise its trade policies with those of SADC’s Free Trade Area, in force since August 2008.

The European Union (EU) and SADC discussed the benefits of an Economic Partnership Agreement (EPA) in March 2010. Mozambique, Botswana, Lesotho and Swaziland were invited to complete internal procedures to bring the June 2009 interim agreement into force. These four countries, however, vowed not to implement the interim EPA until the EU addresses grievances raised by Namibia, South Africa and Angola. Under the EPA, Mozambique would improve its access to EU markets with respect to the 2001 Cotonou agreement, but would also give legally binding commitments concerning imports from the EU.

Figures for 2010 are estimates; for 2011 and later are projections.

The business environment continued to improve, as reflected in the World Bank’s 2011 Doing Business report, which ranked Mozambique four places higher than the previous year, at 126th out of 183 countries reviewed. In 2010, Mozambique introduced reforms that facilitated starting a business, registering property and closing a business. A simplified licensing process lowered the total number of days required to register a business to 13 days, compared to an average of 45.2 days in sub-Saharan Africa. The high cost of capital, with higher nominal and real interest rates than in neighbouring countries, remains a challenge, however. Further reforms are needed to reduce transaction costs and speed up the ongoing land reform, as land titles still cannot be used as collateral to obtain credit.

Structural hurdles are hampering the industrialisation of the economy. The competitiveness of local SMEs is low compared to those in Mozambique’s regional peers, due to the high cost of weak public services such as energy and transport, unskilled human capital and inadequate financing.

The government is committed to continuing its efforts to strengthen the domestic financial sector by implementing the recommendations of the IMF’s Financial Sector Assessment Program. Measures include improved risk management, deposit insurance and enhanced supervision of commercial bank activities. These measures aim to improve the quality of loan portfolios, which will be undergoing regular stress tests. The current financial system is unable to finance big items with a long maturity, particularly in infrastructure.

The banking sector is highly concentrated, with over 90% of total financial assets in 11 private, foreign-owned commercial banks. The microfinance segment is relatively small and highly concentrated as well. Commercial banks are pushing to expand their services in rural areas, but poor rural infrastructure is slowing the shift towards a banked economy. Indeed, the ratio of private credit to GDP remains low, and below the sub-Saharan average. Over half of Mozambique’s 128 districts remain without a bank branch, as most branches are being set up to service new rural investment projects. People living in rural and peri-urban areas own only slightly over 20% of savings accounts, although they account for the large majority of the population.

Mozambique’s stock market, operating since the late 1990s, has failed to develop into a modern, transparent financial institution that enables Mozambicans to finance large national investment projects. Political elites have a vested interest in keeping efficiency low and information asymmetric, with the result that prices fail to reflect market information immediately.

The non-bank financial sector remains small and relatively disconnected from the banking system. The pension sector relies mainly on the state-run pay-as-you-go system.

The second phase of the public sector reform will be finalised in 2011. It aims to improve the image of the public administration, based upon merit, integrity and quality. The decentralisation process will be strengthened through a new government plan covering the 2010-15 period that enables districts to manage and allocate their budgets through the overall financial management information system. Only 13.6% of civil servants work in central agencies.

The government is pushing for the creation of SEZs and IFZs to diversify FDI and develop local nodes of economic growth. To date, however, the SEZs have not lived up to their potential, as the local economy lacks the skills and capacity required to take advantage of the new business opportunities being created.

In 2010, the energy sector absorbed the biggest share of total public investment, concentrated in the new USD 1.9 billion hydroelectric plant in Tete. Other sectors attracting substantial public investment include services and agriculture. The latter, although it attracts a smaller share of total private investment, accounts for the majority of new employment created. Most private investment in 2010 came from South Africa, the EU and China. The main projects in agriculture are production of vegetable oils and bio-fuel processing plants.

To ensure that large investment projects generate wealth and employment through linkages with the local economy, Mozambique has promulgated a new procurement law requiring that at least 20% of each project be spent on national goods and services and that projects with over 100 employees have no more than 5% of foreign employees. Projects financed by official development assistance (ODA) are not subject to these requirements.

As long as Mozambique Telecom maintains its monopoly over fixed-line telephony and broadband infrastructure, telecommunications costs are not expected to decrease. The market for mobile telephony is more liberalised, with two mobile operators, mCel and Vodacom Mozambique. In 2010, a Vietnam-based consortium obtained a licence to become the country’s third mobile operator. The consortium plans to invest USD 465 million over the next five years.

The SEACOM fibre-optic submarine cable and the alternative East African Submarine System (EASSy) link, accessible through a landing station in Maputo, should gradually make services cheaper in the capital, but connecting remote rural areas remains a challenge. To that end, the government will launch a public tender in 2011 to install a new fibre-optic network to connect hospitals, schools and government buildings across the country. In order to promote the use of information and communication technology, the government is seeking to increase the coverage of public facilities providing free Internet access and information technology services from 50 districts to all 128 districts.

In 2009, the government approved a long-term strategy to develop an integrated transport system that would facilitate investment, raise competitiveness and stimulate regional integration. The strategy takes into account the World Bank’s three development corridors in Maputo, Nacala and Tete. It aims to reduce transaction costs, facilitate intermodal freight transportand promote tourism. Coastal maritime transport should benefit from an upgrade of all port infrastructure. A new international airport will be built in Pemba to stimulate tourism, while the other four airports will be upgraded to regional hubs.

Most improvements in the rail sector are financed by private partners interested in coal extraction. The national railway company CFM refurbished rolling stock to transport coal from South Africa to the international market through the port of Matola. The completed Sena railroad should increase transport capacity by 6 million tonnes of cargo per year. Further upgrades of existing transport channels will be necessary to meet the increased demand, which is expected to reach 100 million tonnes by 2025.

Access to electricity improved (17% of the overall population in 2009, up from 14% in 2005), but remains low. The Mozal aluminium smelter alone consumes 900 megawatts (MW), over 70% of the total power output of the Cahora Bassa hydroelectric plant. International donors will provide USD 530 million to fund short- and medium-term projects for electricity generation in Mozambique. From 2013 onwards, the Benga power plant is expected to produce 500 to 600 MW, with future expansion increasing capacity to 2 000 MW. These investments remain far below what is needed to meet current energy needs.

The government’s plan is to improve agricultural productivity to stimulate economic growth and reduce poverty. Over the last decade, however, GDP per capita has increased while agricultural output per capita declined. Agriculture absorbs only 10% of private investment, of which 90% is geared to export-oriented crops. The government plan, which since 2007 has allocated USD 400 million to maize, rice, wheat, soya, sweet potato and manioc farming, has not as yet brought a solution to the problems of low productivity, food insecurity and volatile prices. Storage facilities and transport infrastructure are insufficient to distribute food efficiently across the country.

Following the Cancun summit in August 2010, Mozambique strengthened its strategy to adapt to climate change and mitigate its impact on the agricultural production cycle. Coastal erosion, cyclones and floods strongly affect most of the big cities, which are all located on the coastline. Approximately 1.6% of the budget is dedicated to climate change, below the United Nations (UN) recommendation of 2.5%.