Economy

Growth Story

Economy

While Mozambique cannot expect a quick fix for its economic shortcomings, the leveraging of natural resources and the gradual rise of its middle class promises to see bold strides over the coming decades.

Mozambique’s economy has undergone a phenomenal transformation over the past two decades. Once a moribund developing state, Mozambique became one of the top 10 fastest-growing countries in the world between 2001 and 2010. Since 2006, the country has averaged a phenomenal 7.3% GDP growth, with the gas and coal industries driving a wave of foreign investment. As growth looks set to continue, the challenge moving forward will be for the government to turn GDP growth into long-term structural change by improving infrastructure, developing human capital, and deepening the middle class.

Despite a few setbacks, 2013 saw growth hold steady at 7.4%, following 7.5% growth in 2012, bringing 2013 GDP to approximately $15.03 billion, up from $13.5 billion in 2012 and $12.2 billion in 2011. Severe flooding in the Central and Southern regions of the country during 1Q2013 damaged infrastructure and destroyed agricultural crops, putting a temporary damper on growth. Initial projections of an 8.4% growth rate increase in 2013 were revised downwards in 3Q2013 once the economic impact of the flooding had been fully assessed. This is expected to be only a temporary setback as GDP growth is projected to continue increasing over the coming years, with 8.5% growth projected for 2014 and 8% for 2015. By 2018, the IMF projects that Mozambique’s GDP will have reached $29.4 billion.

In 2012, Mozambique saw a sharp drop in inflation to 2.2%—the lowest in theSADC region, and historically low for the country. This was mainly the result of lower-than-expected food prices. However, 2013 saw inflation rise due to a combination of monetary easing policies and flood-related price increases. The flooding destroyed many agricultural crops in the Southern region of the country, which contributed to an increase in food prices. From its low of 2% in January, inflation increased throughout 1H2013, reaching a high of 5.1% in 2Q2013 before falling again to reach 4% in December. The average inflation rate for the year 2013 was 3.54%. This still falls short of the government’s policy objectives, which see inflation remaining at 5%-6% over the medium term.

Despite the high-profile investments being made in Mozambique’s extractive sector, agriculture still dominates the economy, contributing around 23% of GDP, 80% of exports, and 83% of employment. Transport and communications is another major sector, accounting for 13.5% of GDP, driven by the important role of the country’s logistics industry and the robust growth that has been seen in the telecoms sector in recent years. Financial services, which accounts for just over 6% of GDP is another sector that has seen strong growth as banking penetration grows, new players enter the sector, and low inflation allows for monetary easing and credit expansion.

Mozambique’s significant mineral resources have attracted much international attention, but remain largely untapped. The extractive industry currently accounts for around 2% of GDP, although this is expected to increase to around 3% over the next five years. The greater effect of the growing extractive industry, however, will be its role in upgrading logistics and driving growth in communications, financial services, construction, and real estate.

FOREIGN TRADE & THE CAD

Like most developing economies, Mozambique has consistently maintained a negative current account balance since independence. The past decade of economic growth has further contributed to the current account deficit (CAD) as investment in megaprojects has driven imports in machinery, electronics, and other capital goods. In 2013 the CAD reached $6.6 billion, with a trade deficit of $4.6 billion for goods and $3.2 billion for services. Of the $8.6 billion spent on imports in 2013, around $2.4 billion came from investments in megaprojects. The largest imports into the country are non-crude petroleum, which accounted for 17% of imports, machinery, which accounted for 14%, vehicles, which accounted for 6%, and electricity, which accounted for 4.8% in 2013.

Over the medium term, the CAD is expected to continue widening as Mozambique’s megaprojects ramp up imports to fuel their development. Currently, the trade balance of Mozambique’s megaprojects is very slightly negative, at a deficit of around $187 million in 2013. This is expected to widen over the next five years as capital goods imports continue to rise. However, once coal exports approach full capacity and LNG exports begin in 2018, the CAD is expected to shrink and the IMF estimates that within the next decade, Mozambique could achieve a current account surplus. Since the Mozal smelter began production over a decade ago, aluminum has been Mozambique’s largest export item, accounting for nearly 32% of all the country’s exports. Mozambique’s aluminum is shipped to the Netherlands by BHP Billiton, the operator of Mozal, which uses the global shipping hub as a marketing center to distribute many of its mineral products around the world. As a result, the Netherlands is often, misleadingly, ranked as Mozambique’s number one trading partner, although most of the country’s aluminum actually ends up in Asia. In 2012, coal became the country’s second-largest export item, bringing in around $435 million, and accounting for around 12.5% of total exports. The country produced a total of 4.9 million tons of coal, which was a record in Mozambique’s mining history. Despite the logistical problems caused by the flooding in 1Q2013, coal exports rose slightly in 2013 to around $456 million, or 12.1% of exports. Naturally, as Mozambique’s logistical improvements come online, coal is expected to overtake aluminum and become Mozambique’s number one source of foreign exchange until LNG exports begin flowing at the end of the decade.

Following behind relative newcomers coal and aluminum is electricity, which has been a mainstay of the Mozambican export economy since the end of the colonial era. Mozambique produces a massive surplus of electricity from the Cahora Bassa Dam, which was built by the Portuguese in 1974 near Songo in the Northwest of the country on the Zambeze River. Electricity accounts for around 7% of Mozambican exports.

Apart from aluminum and electricity, the majority of Mozambique’s exports are primary goods. The third and fourth largest exports are tobacco, which brought in $227 million in 2012, and titanium, which brought in $211 million. Also among the top products are wood, cotton, bananas, and cashews.

Unsurprisingly, given its location and the strong ties between the two countries, South Africa is Mozambique’s largest trading partner, accounting for 26% of exports and 31% of imports. Among the other major destinations for Mozambican exports are China, the UK, and India, which rank third, fourth, and fifth respectively. Only one other African country, Zimbabwe, ranks among Mozambique’s top-10 trading partners, which helps to illustrate the logistical challenges that many African countries face, as well as the importance of Mozambique’s role in providing sea connections for its hinterland neighbors. Looking at imports, Mozambique’s other major trading partners are the UAE, Bahrain, and the UK, which rank third, fourth, and fifth, as sources of imports to Mozambique. However, the imports from these three countries combined are less than Mozambique’s imports from South Africa, which totaled almost $2 billion, or around 13% of GDP, in 2012.

FDI

Mozambique has seen massive growth in FDI inflows over the past decade, up from $200 million in 1998 to more than $2.14 billion in 2012. For most of the past decade, these investments have come as part of megaprojects. However, since 2008, total FDI has grown much faster than investment through megaprojects. In 2012, the Investment Promotion Centre (CPI) approved 378 foreign investment projects in Mozambique, up from 272 in 2011 and 234 in 2010. Between 2009 and 2012, Mozambique saw a total of $5.7 billion in FDI from 68 countries and an additional $1.7 billion in national investment, which contributed to a total of 126,558 jobs.

During the 2009-2012 period, 43% of foreign investments were made in the Central region of the country, with the Northern region coming in second with 30%, and the Southern region coming in last with 27%. The majority of these investments were concentrated in four sectors: agriculture (37%), energy (14%), services (12%), and transport and communications (11%). Mozambique has also seen an increasing diversity in the sources of foreign investment. Traditionally, almost all investment in the country has come from Portugal, South Africa, and the UK. However as the economy has grown, and new economic powers have emerged to invest in Africa, new sources of investment have appeared. Between 2009 and 2012, the top source of foreign investment was Portugal, which accounted for approximately a quarter of all FDI. However, the second largest investor during that period was China, which contributed around 21% of FDI. Norway was the third largest investor in Mozambique during this period, contributing 17% of all FDI, most notably in a few major agricultural projects in the Central region of the country. South Africa and the US also ranked among the top five, contributing an additional 11.7% and 6.7%, respectively. Among the remainder of the top 10, were a number of less traditional investors, including Brazil, Mauritius, and India, which accounted for 4.5%, 4.3%, and 2.1% of FDI in Mozambique, respectively.

CHALLENGES MOVING FORWARD

Despite astonishing GDP growth over the past decade, and enormous growth potential in the years to come as Mozambique begins to see the full benefits of its natural resource wealth, the country still faces many challenges in terms of structural reform and human development. Poverty and other social indicators remain unfavorable. The poverty headcount remains at around 54%, unchanged for almost the past decade, although down from around 70% after the civil war. This has presented challenges for both employers looking to hire qualified Mozambicans and for the government, which still needs to dedicate a significant portion of the budget to poverty reduction. At the same time, Mozambique still faces many logistical challenges, which must be overcome before investments in the extractive, agricultural, or manufacturing industries can fully bear fruit. Despite these challenges, however, the future looks extremely bright as Mozambique prepares to become the world’s largest exporter of coal and third largest exporter of natural gas. The influx of investments in other support industries and sectors that have been driven by the mineral resources discoveries will surely play an important role in the coming years in helping Mozambique to achieve inclusive and sustainable development.

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