## _afr1404 — Mozambique Rising: Chapters 2–12 Summary ## Source details **Canonical URL:** [_afr1404 — Mozambique Rising: Chapters 2–12 Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2014/_afr1404.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2014/_afr1404.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2014/_afr1404.pdf.json) --- ### Overview and recent growth experience - Mozambique achieved sustained high growth since the end of the civil war in 1992, with steadier, stronger growth in the most recent decade. - Growth drivers included post-war reconstruction, market-oriented reforms, sustained donor support, favorable commodity prices, and development of natural resources. - Immediate public policy challenges: a relatively young population, strong population growth, low average education levels, and high HIV/AIDS prevalence. ### Megaprojects: characteristics, role, and impacts - Characteristics and examples: - Large, foreign-financed, capital-intensive, export-oriented projects concentrated in natural resources (Cahora Bassa, Mozal, Sasol, Vale, Rio Tinto, Anadarko, ENI). - Mozal: $2 billion investment; consumes about 900 megawatts of electricity; Mozal I & II capacities 245,000 tons each. - Cahora Bassa: maximum generation capacity about 2,000 megawatts; five 415-megawatt turbines. - Contribution to growth and exports: - Megaprojects account for about 60–70 percent of total merchandise exports in recent years; megaprojects and related industries account for about 70 percent of exports in another summary statement. - Start-up years produced an estimated "2–4 percentage point increase in growth in each year of active construction." - Confirmed coal deposits in Mozambique are over 32 billion tons; coal production reached 5 million tons in 2012. - Coal and gas projected to contribute about 20 percent of GDP by 2023; coal and gas contributions to GDP growth projected to average 2 percentage points per year between 2013 and 2023. - Combined revenue from coal and LNG projected to reach about 10 percent of GDP, or a third of government revenue, by 2030. - Employment and spillovers: - Megaprojects generate limited permanent employment: Mozal employs about 1,100 permanent staff and 1,600 contractors; Mozal employs 0.02 percent of the labor force yet contributes about 5 percent to GDP. - Construction phases can create significant temporary employment (e.g., Mozal reportedly hired 15,000 people during construction phases). - Indirect local spending cited: Mozal’s local spending increased from $5 million to $17 million per month between 2002 and 2007. - Fiscal contribution and taxation: - Megaprojects contributed on average less than ½ percent of total fiscal revenues during 2007–11. - Fiscal regimes revised in 2007 for new contracts; older contracts typically allow amortization and favorable treatment; government pledged renegotiation as contracts expire. - Risks and policy implications: - High exposure to international commodity market volatility. - Recommendations include broadening FDI base, limiting tax incentives, unified fiscal framework for megaprojects, leveraging megaproject infrastructure for wider use, and promoting local content and training. ### Infrastructure development and public investment management - Access and gaps: - Access to networked electricity, roads, improved water, sanitation, telecom, and Internet remains relatively poor with large urban-rural disparities. - Electrification: approximately 15 percent of households have access to electricity; Cahora Bassa generates 2,075 megawatts (about 85 percent of current energy production capacity) with most power exported. - Safe water access: 43 percent of the population; adequate sanitation: 19 percent. - Road network: total 37,000 kilometers; paved about 6,000 kilometers; road density 46 meters per square kilometer. - Public investment levels and constraints: - Public capital expenditure exceeded 10 percent of GDP in 16 of the past 20 years. - Per-capita public infrastructure spending remains very low; maintenance financing gap present—allocating less than 20 percent of what is required to maintain the road network. - Absorptive capacity concerns: investment efficiency assumed at 60 percent in steady state; could fall to around 30 percent if public investment spikes ~200 percent above initial steady state. - Public Investment Management (PIM) priorities: - Six pillars recommended: legal framework; independent institutional evaluation; capacity building; uniform norms and methodologies; integrated projects bank; ex post evaluation. - Recommendation: pace increases in public investment alongside strengthening PIM and public management capacity. ### Inclusive growth, poverty dynamics, and PARP 2011–14 - Poverty trends and human development: - National poverty headcount fell from "69 percent in 1997 to 54 percent in 2003". - 2008/09 household survey showed stagnation in overall poverty rates after 2003; national poverty headcount reported as 69.0 percent in 1996/97 and 54.1 percent in 2003 in another table. - Growth after 2000 was less pro-poor compared with other high-growth African economies; Human Development Index remained below the sub-Saharan African average. - PARP 2011–14 pillars and objectives (Box 4.1): 1. Increase production and productivity in agriculture and fisheries. 2. Promote employment via business environment reforms, vocational training, and linkages with megaprojects. 3. Foster human and social development (universal access to seven years of primary education; improved water, sanitation, electricity; expand social protection floor). 4. Foster good governance. 5. Preserve macroeconomic stability and strengthen public investment architecture. - Implementation gaps: - PARP lacked specificity in priorities, sequencing, measurable actions, and interministerial coordination. - Data limitations: the next household survey planned for "2014–15, with the results expected to become available in 2016." ### Demographics, employment structure, and labor market projections - Demographic context: - Population growth about 3 percent a year; in 2010 total population about 24 million with about 45 percent aged 14 or younger. - Labor force initially high LFPR set at 89 percent with projected decline to 79 percent by 2029. - Average annual growth rate of the labor force in 2010–50 projected at 2.7 percent. - Employment structure and projections (baseline to 2050): - Agriculture employed around 80+ percent of the economically active population in 2010. - Sectoral employment shares (selected sequence values preserved): - Agriculture share declines from about 80.9/82.5/78.8/... to about 44.5 by 2050 (sequence: 80.9, 82.5, 78.8, 75.6, 71.6, 66.5, 62.1, 57.2, 51.4, 44.5). - Wage industry rises from about 2.5 to about 5.2 (sequence: 2.5, 2.2, 2.3, 2.5, 2.8, 3.3, 3.7, 4.1, 4.6, 5.2). - Wage services rises from about 8.4 to about 27.7 (sequence: 8.4, 7.7, 9.8, 11.5, 13.5, 16.1, 18.4, 21.0, 24.1, 27.7). - Nonwage services rises from about 6.9 to about 16.1 (sequence: 6.9, 5.8, 7.2, 8.1, 9.3, 10.7, 11.8, 13.1, 14.5, 16.1). - Absolute agricultural employment continues to grow in baseline despite declining share; services and industry expand but cannot absorb all entrants over next 20–30 years. - Policy implication: increase agricultural productivity and remove rural infrastructure bottlenecks to improve rural welfare and inclusiveness. ### Agriculture: performance, constraints, and priorities - Sector role and statistics: - Agriculture is source of livelihood for more than three-quarters of the population but contributes only about "a quarter of GDP" (explicit statement). - Primary sector share of total output was 29.6 percent in 2012. - Agricultural sector growth averaged about 7 percent per year since 2003. - 2009–10 Agricultural Census key findings (Box 6.1): - Cultivated area increased by 24 percent over 1999–2009. - Number of agricultural producers increased by 45 percent over that period. - About one-third of farms <1 hectare; two-thirds between 1 and 10 hectares. - Only 5 percent of producers use irrigation; less than 3 percent use fertilizers. - More than 40 percent of producers can neither read nor write. - Policy and investment priorities: - Seed technology: less than 10 percent of staple area planted with certified seed; backlog of >80 varieties awaiting registration (2011). - Fertilizer use: 4.3 kilograms per hectare (compared with 9.5 kg in Ghana and 8.2 kg in Ethiopia). - Irrigation: only about 1 percent of potential irrigable land is irrigated for food; effectively irrigated area composition: sugarcane 60 percent, smallholder horticulture 18 percent, rice 10 percent. - Land: DUAT applications area increased more than five times from 2005 to 2009; moratorium on DUATs >1,000 hectares between 2009 and 2011. - PNISA (sector investment plan) aims for annual agriculture growth of at least 7 percent and increase area under food crops by 25 percent by 2020 (combined with productivity improvements). - Financing and structural constraints: - Lending to agriculture fell from 20 percent of commercial lending in 2000 to 6 percent in 2010. - Only 2.3 percent of producers report access to some form of credit. - Targeted reforms: strengthen value chains, market access, rural finance, input distribution, and irrigation. ### Development corridors and regional linkages - Three major corridors: - Maputo Corridor (to South African border). - Nacala Corridor (linking central/northern provinces to Nacala deep water port). - Beira Corridor (linking central provinces and Zimbabwe with Beira port). - Nacala Corridor highlights: - Vale-led 912 km railway rehabilitation to Nacala port; $3.4 billion investment; railway expected late 2014/early 2015. - Rail capacity on Nacala Corridor expected to increase to 18–20 million tons by 2017, eventually to 30 million tons. - Beira Corridor and BAGC: - Sena rail line redeveloped and reopened June 2010; plans to expand Beira port and Sena rail capacity from 6 million tons to 20 million tons. - Beira Agricultural Growth Corridor launched 2010; BAGC Catalytic Fund and Alliance for a Green Revolution in Africa support irrigation and smallholder services. - Constraints and policy direction: - Weak private sector capacity and weak institutional platforms to coordinate corridor development. - Recommended actions: public-private institutional platforms, targeted integrated interventions, public investments in roads/water/energy, skills, land-use planning, and social/environmental safeguards. ### Financial inclusion and financial sector development - Structure and depth (end-2012): - 18 banks; eight microbanks; seven credit unions; 11 savings and loans organizations; 202 microcredit operators; one electronic money institution; 3,051 mobile banking agents. - Private sector credit to GDP: 13.2 percent in 2005 to 28.8 percent in 2012. - Broad money to GDP: 28.9 percent in 2005 to 45.6 percent in 2012. - Ratio of domestic deposits to GDP rose from 24.5 percent in 2003 to just under 35 percent in 2012. - Private credit to GDP almost tripled to about 30 percent (alternate statement). - Nonperforming loan rate: 3.2 percent of total loans. - Access and usage: - Share of adults holding at least one deposit account: 6 percent in 2005 to 20 percent in 2012. - Share of adults holding at least one credit account: 0.3 percent in 2005 to 3.9 percent in 2012. - FinScope 2012: 75 percent of MSMEs financially excluded; only 11 percent of MSME owners used some form of formal financial service. - Policy actions (Financial Sector Development Strategy 2013–22): - Establish private credit registry bureaus; promote mobile banking; strengthen insolvency framework; set up moveable collateral registry; Deposit Insurance Fund to begin operations in 2014. - Complementary measures: basic infrastructure in districts, financial literacy, decentralization of budget execution, agricultural insurance programs, broaden collateral framework. ### Social protection and the Social Protection Floor (SPF) - Rationale and design: - ENSSB and Operational Plan (2010–14) aim to extend coverage, increase efficiency, and assure coordination across programs. - Targeted program mix includes PSSB (social pension), PASD (temporary support/in-kind), Programa de Apoio às Unidades Sociais (institutional care), and PASP (cash-for-work and training). - Coverage and fiscal cost projections (selected table values preserved): - Operational Plan household coverage totals: - Total households targeted: 2012: 494,640; 2013: 632,136; 2014: 814,981. - Estimated total cost of current government proposal: - Total: 2012: 2,475 million MT 0.58 percent of GDP; 2013: 3,425 million MT 0.69 percent of GDP; 2014: 4,617 million MT 0.81 percent of GDP. - Program-specific monthly transfer amounts (2013): - PSSB main benefit MT 253 + MT 63 per dependent. - PASD basic food basket average value MT 985. - PASP monthly transfer amount MT 650 (poverty-line fixed per household). - Policy scenarios and fiscal envelope: - Initial resource envelope: 0.8 percent of GDP envisaged for 2014–16. - Policy Scenario A (government Operational Plan): PASP reaches just above 1 million beneficiary households in 2022; PSSB should not exceed 400,000 households; PASD about 130,000 households at full scale. Scenario A consistent with IMF medium-term fiscal framework for 2012–17. - Policy Scenario B (restructuring beyond 2015): centers on a social pension and a child benefit; costs rise significantly after 2017. - Implementation requirements: - Expansion feasible only if accompanied by investment in management and information systems (single registry), payment modalities (mobile banking), beneficiary identification, monitoring and evaluation. ### Natural resource boom: fiscal challenges, modeling, and public investment strategy - Resource prospects and timing: - Rovuma Basin discoveries: combined reach 200 TCF; planned four LNG trains with each train capacity 5 million tons per year; maximum 20 million tons per year by 2023 under baseline assumptions. - FARI model baseline: LNG production start projected 2020; maximum capacity reached in 2023. - Box 11.1 fiscal assumptions: - Total investment projected $40 billion; financing 30 percent equity / 70 percent debt. - Government participation 10–15 percent. - Fiscal parameters: corporate income tax 24 (first 8 years), 32 (after first 8 years); subcontractor withholding tax 20; dividend withholding tax 10; royalty 2; cost recovery limit 65; R-factor schedule with profit-gas shares 10/20/30/50/60. - Macroeconomic and fiscal simulation findings: - FARI results: LNG exports peak at 30 percent of non-oil GDP; taxes and other fiscal revenue from natural gas at peak reach 9 percent of non-oil GDP (roughly one-third of total fiscal revenue). - DIGNAR model public investment paths: - Conservative approach: no additional public investment until LNG starts in 2020. - Gradual approach: anticipate some LNG revenue and scale up investment gradually before production start—recommended as appropriate. - Aggressive approach: massive frontloading leads to absorptive constraints, much higher debt, and unsustainable outcomes under adverse scenarios. - Investment efficiency assumptions: steady-state efficiency 60 percent; inefficiency losses estimated (e.g., Domínguez-Torres and Briceño-Garmendia estimate $204 million lost annually in late 2000s compared to $664 million spent). - Simulations underline importance of anticipating only part of future LNG revenue given uncertainty; gradual scaling-up outperforms conservative and aggressive approaches. - Fiscal rules and volatility management: - Price-based fiscal rules examined: Ghana (5/0/0), Trinidad and Tobago (5/1/5), Mongolia (12/1/3). - Structural primary balance target in simulations: 1 percent of nonresource GDP considered; targets below 1 percent risk debt accumulation/disrupted budget implementation. - Mongolia rule (12/1/3) does best on expenditure smoothing but may generate high financial savings that could be too high given infrastructure needs. - Combining a 5/0/0 price rule with an expenditure growth limit of 10–15 percent real per year could accumulate significant savings (close to 300 percent of nonresource GDP by 2050 in illustrative simulation). - Institutional recommendations: - Strengthen tax administration and Large Taxpayer Unit audit capacity. - Upgrade public investment management: harmonize planning documents, budget markers, centralized certification for value-for-money, prioritization based on economic/social criteria. - Improve budget execution: cash flow programming, reduce large advance payments, limit in-year appropriations changes. - Establish a sovereign wealth/development fund when resource revenues are substantial with separate stabilization and savings accounts; the fund should not have independent spending authority. - Enact a Fiscal Responsibility Law including medium-term fiscal objectives, calculation rules for resource revenues, sovereign fund rules, and correction mechanisms. - Ensure transparency in production, exports, and revenue reporting; align with EITI standards and require public enterprise disclosure. ### Dutch disease risks and mitigation - Current evidence: - Little strong evidence of Dutch disease to date; REER relatively stable since 1995. - Since 2011 nontradables price growth ~13 percent, tradables ~11 percent—marginal competitiveness loss by this measure. - Traditional exports grew almost 19 percent per year on average between 2006 and 2012; grew on average 40 percent per year starting in 2010. - Policy options to mitigate risks: - Establish fiscal rules early to govern use of resource revenue. - Create a sovereign wealth/development fund with clear rules and oversight. - Design a public investment strategy consistent with national development plan and medium-term budget. - Strengthen institutional and human capacity for project assessment and public investment management. - Invest in education and infrastructure and improve the business environment to support nonresource competitiveness. ### Fiscal, institutional, and structural reform priorities — summary recommendations - Macroeconomic and fiscal management: - Preserve macroeconomic stability while creating fiscal space for priority public investment. - Adopt fiscal rules and institutions to smooth revenue volatility and ensure intergenerational equity. - Conduct regular debt sustainability analysis and monitor debt closely. - Public investment and PIM: - Pace public investment increases with absorptive capacity improvements. - Strengthen PIM: project appraisal, appraisal review, project selection & budgeting, implementation, change management, service delivery, and ex post evaluation. - Governance and capacity building: - Strengthen tax administration, public financial management, procurement, and project oversight. - Improve interministerial coordination across national development plan, PARP, PII, medium-term debt strategy, and DSA. - Inclusive growth and jobs: - Prioritize agricultural productivity growth, rural infrastructure (roads, irrigation, electricity), market access, and financial inclusion to absorb labor-force entrants. - Promote private sector development—small and large firms—to be the primary engine of employment. - Expand targeted social protection (SPF) with robust delivery systems (single registry, mobile payments, monitoring and evaluation). - Leverage megaprojects: - Translate megaproject investments into wider economic benefits by improving the business climate, encouraging local sourcing and subcontracting, training programs, and ensuring multiuse infrastructure where possible. *Italic: Content derived exclusively from the IMF PDF content unit _afr1404 — "Mozambique Rising—Building a New Tomorrow" (chapters 2–12 summary and appendices) as supplied.* ### 1. Economic development – Mozambique. I. Ross, Doris C. ### Overview: Mozambique Rising—Building a New Tomorrow ### Mozambique’s recent growth experience - Highlights Mozambique’s remarkably strong growth over the two decades since the end of the civil war in 1992. - The volatility of the earlier decade gave way to steadier, stronger growth over the most recent one. - While initially dominated by post-war reconstruction, government policies also laid the foundations of a market economy. - These policies were supported by a favorable external environment, donors, and, more recently, the discovery and development of natural resources. ### Role of megaprojects, foreign investment, and agriculture - Growth has been driven largely by foreign investments, especially megaprojects—large capital-intensive investment projects. - Except for the Cahora Bassa hydropower station and Mozal, which transforms imported bauxite into aluminum for export, the other megaprojects focus on mining and natural resource exports. - Agriculture remains the dominant source of employment. - Growth in agriculture has come more from an expansion of the cultivated area and of agribusinesses than from increases in low yields in subsistence farming. ### Social and demographic challenges - Public policy challenges include a relatively young population, continued strong population growth, low average education levels, and public health issues such as a high prevalence of HIV/AIDS. - The authorities’ most recent poverty reduction strategy (2011–14) focused on: - increasing production and productivity in agriculture, - promoting employment, and - fostering human and social development. ### Macroeconomic policy and institutional capacity - The government complemented its generally sound macroeconomic policies with a series of structural reforms amid favorable global economic conditions (commodity prices) and sustained strong donor support (development aid). - The initial focus was on exchange and trade liberalization, reducing fiscal imbalances, and the role of the state in the economy. - Later the focus shifted to reducing vulnerabilities and increasing resilience to shocks. - Institutional capacity is still weak in many areas such as economic analysis and policy formulation, and investment planning and implementation. ### Investment priorities and trade-offs - A framework is urgently needed to assess priorities and trade-offs in the composition of investment—for example: - weighing investment in the infrastructure needed to develop natural resources against investment in agricultural productivity (more supportive to inclusive growth) and/or broader social infrastructure (water, health facilities, schools). ### Natural gas and policy implications - The development of the country’s riches in gas poses major challenges for the government’s policy formulation in the next few years, yet also provides an opportunity for major advances. *Source: Overview: Mozambique Rising—Building a New Tomorrow, Doris C. Ross* ### Chapter 2 provides an overview of the development and role of megaprojects in ### _afr1404 - Chapter 2 provides an overview of the development and role of megaprojects in ### Megaprojects: characteristics, role, and impacts - Megaprojects are described as large, foreign-financed projects, often in the natural resource sector, that are capital-intensive and export-oriented. - These projects often invest in purpose-built infrastructure to serve their specific needs, making them less sensitive to Mozambique’s comparative disadvantage in the limited availability of infrastructure and skilled labor. - Contribution to growth: - Megaprojects made a significant contribution to growth but generated only limited employment. - Investment in megaprojects boosted growth, accounting for an estimated "2–4 percentage point increase in growth in each year of active construction". - Local spillovers and constraints: - Provide opportunities for local contractors in job creation and knowledge transfer that remain to be fully exploited. - The government could facilitate indirect benefits by further improving the business climate. - Fiscal effects and taxation: - Megaprojects contributed little to fiscal revenues until recently, partly reflecting large upfront investment needs and tax rules that allow investors to amortize investment costs when calculating profits. - Mozambique’s early tax legislation was particularly favorable to early megaprojects and likely helped attract investments. - As initial contracts come up for renewal, the government has pledged to renegotiate parameters. - Concession agreements for later megaprojects reflect updates in Mozambique’s tax legislation to conform more closely to international standards. - Risks: - Megaprojects carry inherent risks tied to the vagaries of international commodity markets that can affect profitability considerably. ### Infrastructure development and public investment (Chapter 3) - Despite high levels of public investment in terms of GDP over an extended period, investment remains low in absolute terms and access to networked electricity, roads, improved water sources, sanitation, telecommunication, and Internet services is still relatively poor in most areas. - There are significant urban-rural disparities in access to basic infrastructure. - For investment to succeed, it needs to be: - Managed effectively: high quality, addressing identified key gaps, implemented effectively, and maintained and operated to ensure continuity in service delivery. - Accompanied by improvements in “soft infrastructure”: transport logistics and the business environment to allow the private sector to develop. - Institutional capacity: - Efforts are under way to improve public investment management, but these initiatives will take time. - Increases in public investment should be paced alongside the strengthening of public management capacity. - Improvements in the business environment are essential to translate infrastructure efforts into private sector activity and job creation. ### Inclusive growth and poverty dynamics (Chapter 4) - Poverty trends: - National poverty headcount reduced from "69 percent in 1997 to 54 percent in 2003". - The 2009 household survey showed stagnation in overall poverty rates after 2003, heightening social tensions. - Policy response: - Mozambique’s Third Poverty Reduction Strategy (Plano de Accão de Reducão de Pobreza —PARP) 2011–14 focuses on: - Improving agricultural productivity. - Creating jobs through business environment improvements and training. - Developing more focused and better-designed social protection programs. - Preserving macroeconomic stability. - Implementation gaps: - PARP aligns with macroeconomic policies but could have provided additional specificity in priorities, sequencing, and measurable actions. - Channels for interministerial coordination for cross-cutting accountability were missing. - Data to measure some performance indicators are of low quality and frequency. - Monitoring: - The next household survey is planned for "2014–15, with the results expected to become available in 2016." ### Demographics and employment structure (Chapter 5) - Long-term transformation: - With a young population and continued strong population growth, industry and services are not likely to absorb all projected labor force growth. - The absolute level of employment in agriculture is likely to continue to rise over the next 20 years. - Policy implications: - Policies should support diversification of economic structures while enhancing agricultural productivity to improve rural welfare, reduce poverty, and improve inclusiveness. ### Agriculture sector challenges (Chapter 6) - Importance and performance: - Agriculture is the source of livelihood for more than three-quarters of the population but contributes only about "a quarter of GDP". - Mozambique remains a net food importer; malnutrition is chronic and pervasive. - The sector has experienced strong growth over the past two decades but requires significant further development. - Government reforms and priorities: - Reforms under way include seed technology, fertilizer availability, irrigation, land rights, market access, business environment, financial services, and nutrient fortification. - These reforms aim to incentivize private investment and integrate smallholders into value chains. - Resource constraints: - The sector investment plan is ambitious; public resources will need to be allocated strategically, with market access playing a crucial role. ### Development corridors and regional linkages (Chapter 7) - Three major growth corridors: - The Maputo Corridor (to the South African border). - The Nacala Corridor (linking central and northern provinces and neighboring countries to the Nacala deep water port). - The Beira Corridor (linking central provinces and neighboring Zimbabwe with the Beira port). - Focus and outcomes: - Infrastructure investments are focused on these corridors; there has been some success but much remains to be done to strengthen linkages between large investments and smaller enterprises and smallholders. - Mozambique’s private sector remains weak, poorly organized, and largely informal, lacking business and financial capacity to capture spillovers from large investments. - Policy direction: - Key sector-specific constraints should be addressed systematically in partnership with the private sector to realize potential job creation in construction, agribusiness, services, and light manufacturing. ### Financial inclusion (Chapter 8) - Current status: - Despite expansion of banking institutions and financial services, most households and SMEs remain financially excluded. - Strategy: - In 2013, the government adopted the "2013–22 Financial Sector Development Strategy" to expand access to and efficient use of financial services. - Requirements for success: - Effective coordination with stakeholders, structural reforms to extend services to rural areas. - Users must have the ability to use existing services—concerns include availability of cell phone service, low productivity and incomes in rural areas, geographic distribution of households, and low managerial capabilities of SMEs. ### Social protection and the Social Protection Floor (Chapter 9) - Focus: - Work with the International Labor Organization on the Social Protection Floor (SPF) Initiative centers on noncontributory social protection (transfers), given limited coverage of contributory subsystems. - Fiscal and operational considerations: - Progressively building an SPF adapted to Mozambique’s needs does not present a threat to fiscal sustainability. - SPF spending has been made possible by revenue reforms and reprioritization of expenditures. - Expansion is feasible only if accompanied by significant investment in more effective and efficient service delivery systems. - Systems development: - Ongoing development of a new management and information system, including a single registry, new payment modalities (e.g., mobile banking), new identification and beneficiary selection processes, and monitoring and evaluation mechanisms, with partner support. ### Fiscal policy, natural resource boom, and macro-fiscal management (Chapters 10–12) - Resource prospects: - Coal mining is expanding; recent natural gas discoveries are likely to transform Mozambique into a major resource-rich country. - Fiscal challenges and policy objectives (Chapter 10): - Managing the boom well could allow Mozambique to avoid the "resource curse" and leverage wealth for development. - Fiscal policy must balance scaling up investment in priority sectors (considering capacity constraints) against long-term fiscal sustainability and exhaustibility. - Important measures include shielding the annual budget from price volatility through fiscal rules and strengthening institutions, including public financial management. - Given high capacity constraints, the pace of using resource wealth should be gradual. - Modeling public investment, growth, and debt (Chapter 11): - World-class gas discoveries off the northern coast could begin to provide significant economic benefits, including government revenues, by the end of the decade. - Model results indicate that a gradual scaling-up of public investment anticipating some, but not all, future gas revenue would be appropriate given infrastructure needs, uncertainty of gas production and revenue, and debt sustainability implications. - Reaping full returns requires enhanced efficiency of investment via strengthened investment planning and coordination; project assessment, selection, and monitoring; improved governance; and complementary infrastructure. - Dutch disease risks and mitigation (Chapter 12): - No strong evidence of Dutch disease in Mozambique to date, but rising resource revenue increases the risk of real exchange rate appreciation that could harm nonresource competitiveness. - Policy options to support nonresource competitiveness include: - Establishing, early on, fiscal rules governing use of resource revenue. - Creating a sovereign wealth/development fund with clear rules and oversight. - Establishing a well-designed public investment strategy/plan consistent with the national development plan and medium-term budget. - Strengthening institutional and human capacity to assess and implement investment projects. ### Summary conclusions and policy priorities - Mozambique achieved high and sustained growth over the past two decades, recovering from civil war. - Immediate priorities: - Share growth benefits more broadly across the population. - Address challenges of structural transformation from agriculture to large-scale mining, agro-business and processing, and services. - Enablers for success: - Continued institutional and capacity building in public administration to improve economic policymaking and governance. - Further opening to and facilitation of private sector activity—small and large firms—as the primary source of future employment. - Strengthened public investment management, improved business climate, and targeted reforms to maximize spillovers from megaprojects and resource wealth. *International Monetary Fund — Overview: Mozambique Rising—Building a New Tomorrow (chapters 2–12 summary).* ### Appendix II); IMF (2013b, Appendix III); and Melina and Xiong (2013). ### MOZAMBIQUE RISING ### Growth, Megaprojects, and Structural Change - Post-war reconstruction and market reforms led to a strong recovery in net exports of goods and services. - Investment and FDI inflows since 2007 linked to import growth; net exports weakened after 2011. - Export base shifted away from traditional exports (prawns, cotton, timber, raw cashew nuts, sugar) toward megaprojects (mainly aluminum, electricity, and coal), which account for about 70 percent of total merchandise exports; traditional exports grew in absolute terms. - Recent resource projects cited: Cahora Bassa, Mozal, Sasol (gas pipeline to South Africa), Kenmare heavy sands, Vale and Rio Tinto coal mines, ENI and Anadarko gas exploration in the Rovuma basin. ### External Accounts and Donor Financing - Imports now driven by bauxite, fuel, and other extractive industry-related imports. - External current account deficit reached 46 percent of GDP in 2012. - Excluding megaprojects, the current account after grants has been close to balance. - Between 1998 and 2004, foreign grants and loan receipts averaged 15 percent of GDP, 70 percent of which were grants. - Grants still constituted around 6 percent of GDP in 2012. - Donor flows allocated mainly to priority sectors in PARP: agriculture, road construction, education, and health; most loans on IDA or other concessional terms. - Debt relief: HIPC Initiative (1999 and 2001) and MDRI (2006) substantially reduced external debt. ### Poverty, Human Development, and Regional Patterns - National poverty headcount (national poverty line) fell from 69.0 percent in 1996/97 to 54.1 percent in 2003 (Table 1.1). - 2008/09 household survey showed at best stagnation in poverty rates since 2003, with more than half the population living below the poverty line. - Poverty reduction was stronger early on and concentrated in rural areas and the southern regions/urban centers (Maputo area); nationwide rural poverty remains severe. - Growth after 2000 was less pro-poor than other African high-growth economies, and Mozambique’s Human Development Index remained below the sub-Saharan African average. - Improvements in other human development indicators: primary school attendance, vaccination coverage, and attended births improved alongside poverty decline. ### Labor, Demographics, and Human Capital Constraints - Population growth about 3 percent a year; labor force increasing even more rapidly. - More than 90 percent of the labor force has either none or only up to five years of formal education. - Employment remains dominated by agriculture (around 80 percent of the economically active population), mostly in subsistence activities with very low productivity. - Agricultural productivity growth has favored larger farmers and agribusiness over smallholders. - Manufacturing requires higher education profiles (grades 6–12 and beyond) than usually available. - HIV/AIDS prevalence: 16 percent (twice the sub-Saharan African average cited); life expectancy for persons with HIV/AIDS about 37 years, compared to 50 years for persons without HIV/AIDS. - Policy implication emphasized: continue prioritizing investment in education and public health. ### Government Poverty Reduction Strategy - Mozambique’s third Plano de Accão de Reducão de Pobreza (PARP) covers 2011–14. - Key pillars: increase production and productivity in agriculture, promote employment, and foster human and social development. ### Macroeconomic Policy Mix — Fiscal Policy - Fiscal policy described as prudent across the two decades examined. - Policy reforms aimed to secure macroeconomic stability and implement structural reforms while mitigating domestic demand pressures. - Revenue-side reforms: introduction of value-added tax (VAT) in 1999; new income tax code in 2003; Autoridade Tributaria Mocambicana established in 2005. - Expenditure focus: prudent management targeted to priority and social sectors; aid channeled to infrastructure and vulnerable populations. - Privatization reduced SOE role to less than a third of industrial output by 2000; more recently SOEs have gained importance, including through production-sharing agreements for natural resources. ### Monetary and Exchange Rate Policy - Transition to indirect instruments of monetary control in the early 1990s; interest rates fully liberalized in 1994. - Bond market commenced in the late 1990s; interbank money market introduced in 1997. - Episodes of high inflation (e.g., late 2010) managed through fiscal consolidation and increased exchange rate flexibility. - Exchange rate volatility managed through market-based actions, particularly during periods of high international commodity prices. ### Financial Sector Policy and Development - Early reforms focused on privatizing state-owned banks, promoting stability, and improving depth. - Institutional framework: financial institutions law and central bank law passed in 1991 with banking supervision rules; prudential regulations for on-site and off-site inspections introduced. - Recent emphasis on increasing resilience to vulnerabilities from concentrated ownership and strong credit growth through supervisory and prudential measures. - IMF and World Bank 2009/10 Financial Sector Assessment Program Update noted progress in strengthening and developing the financial sector. ### Public Financial Management and Institutional Development - Institution-building progressed from a state-controlled socialist model toward market-oriented frameworks with structural reforms across public financial management, financial sector development, debt strategy, business climate reform, and extractive industry transparency. - Public financial management reform program commenced in 2002 with the Integrated Financial Management Information System Law (SISTAFE) to develop a computerized integrated public sector budget and financial management system. - Implementation of SISTAFE modules improved planning and budgeting, financial execution, accounting, reporting, controls, and ICT deployment. - Successive Public Expenditure Financial Accountability assessments show improvements; Mozambique ranked among stronger PFM performers in Africa. - Coordination challenge: strategy documents (national development strategy, PARP, PQG, PES, PII, medium-term debt strategy, DSA) often prepared in isolation; recommendation for stronger interministerial coordination groups to enhance effectiveness and contain costs. ### CPIA Performance (World Bank 2013) - Overall CPIA Score: 3.7 (SSA average: 3.2) - Economic Management: 4.5 (SSA average: 3.4) - Monetary and Exchange Rate Policy: 4.5 (SSA: 3.6) - Fiscal Policy: 4.5 (SSA: 3.3) - Debt Policy: 4.5 (SSA: 3.3) - Structural Policies: 3.5 (SSA: 3.2) - Trade: 4.0 (SSA: 3.6) - Financial Sector: 3.5 (SSA: 2.9) - Business Regulatory Environment: 3.0 (SSA: 3.1) - Policies for Social Inclusion and Equity: 3.5 (SSA: 3.2) - Gender Equality: 3.5 (SSA: 3.2) - Equity of Public Resource Use: 3.0 (SSA: 3.3) - Building Human Resources: 4.0 (SSA: 3.5) - Social Protection and Labor: 3.5 (SSA: 2.9) - Policies and Institutions for Environment Sustainability: 3.5 (SSA: 3.1) - Public Sector Management and Institutions: 3.4 (SSA: 2.9) - Property Rights and Rule-Based Governance: 3.0 (SSA: 2.7) - Quality of Budgetary and Financial Management: 4.0 (SSA: 3.0) - Efficiency of Revenue Mobilization: 4.0 (SSA: 3.4) - Quality of Public Administration: 3.0 (SSA: 2.8) - Transparency, Accountability and Corruption in Public Sector: 3.0 (SSA: 2.7) *Source: Excerpt from Mozambique Rising (IMF).* ### Chapter 8 ). Private banks now represent about 95 percent of total fi nancial ### _afr1404 - Chapter 8 ). Private banks now represent about 95 percent of total fi nancial ### Financial sector structure and soundness - Private banks now represent about 95 percent of total financial sector assets. - Key statistics: - Ratio of domestic deposits to GDP rose from 24.5 percent in 2003 to just under 35 percent in 2012. - Private credit to GDP almost tripled to about 30 percent. - Nonperforming loan rate: 3.2 percent of total loans. - The three largest banks accounted for 85 percent of banking system assets in 2011, down from 100 percent in 2004. - Fifteen of the 18 existing banks are locally incorporated subsidiaries with more than 50 percent foreign ownership. - System characteristics: - The banking system is well capitalized and profitable. - High concentration in the banking sector persists despite some decline. ### Financial sector development strategy and policy actions - A 2013–22 Financial Sector Development Strategy adopted in early 2013 outlines a broad vision and roadmap. - Follow-up actions planned or initiated: - Establishment of private credit registry bureaus. - Promotion of mobile banking. - Strengthening of the insolvency framework. - Setting up of a moveable collateral registry. - Adoption of a Financial Sector Contingency Plan in April 2013. - A Deposit Insurance Fund is to begin operations in 2014. - Policy emphasis: broadening access to financial services to support poverty reduction, business environment improvement, and private sector growth. ### Debt strategy and management - HIPC and MDRI debt relief reduced debt service and created fiscal space of 12 percent of GDP during 2001–10. - Debt accumulation after relief was mostly on concessional terms until 2011 and proceeds were used mainly to improve infrastructure or for other priority projects. - Institutional developments: - Mozambique is developing the institutional framework for debt management. - Adopted a medium-term debt strategy in late 2012. - Remaining challenges: - Translating strategy into ongoing analysis to inform policy choices and decisions. - Aligning debt management and investment planning to improve economic and social returns while safeguarding debt sustainability. ### Business climate reform - World Bank Doing Business Survey: - Mozambique’s overall ranking in 2013: 139 (out of 189 economies surveyed). - Progress reported in areas such as “dealing with construction permits” and “trading across borders.” - World Economic Forum’s 2014 Global Competitiveness Index ranking: 137th out of 152 countries. - Government actions to attract investors: - Established a one-stop investment center in cooperation with the International Finance Corporation. - Introduced or changed regulations to improve investor property rights and contract enforcement. - Caution: risk that resource-related high growth rates may lead to complacency rather than renewed impetus on strengthening nonresource economic activity. ### Governance and extractive industry transparency - Governance performance: - Mozambique performed better than both sub-Saharan Africa and low-income countries on the World Bank’s Worldwide Governance Indicators, with improvements in government effectiveness, regulatory quality, and the rule of law. - Mo Ibrahim Index of Governance (2013): Mozambique ranked 20th out of 53 countries with 54.8 out of 100 maximum points. - Transparency International’s Corruption Perceptions Index (2013): Mozambique scored 119th out of 177 with 30 out of a maximum of 100 points. - Extractive industry transparency: - Applied to the Extractive Industry Transparency Initiative in 2009 and declared fully compliant with EITI rules in 2012 (second report covering 2010). - Endorsed the Global Partnership for Social Accountability in 2012. ### Evidence from growth accounting - Empirical framework: standard growth accounting based on a Cobb-Douglas-type function (see Appendix 1.1). - Main findings: - Mozambique’s growth has been largely capital-intensive, with capital accumulation accounting for a larger share of growth than other factors in the two periods analyzed. Though the share of capital declined in the second period, it still contributed substantially. - Labor’s contribution to growth remained more or less constant in both periods, reflecting population growth. - Contribution of total factor productivity (TFP) increased from 13 percent in the first period to 36 percent in the second period, indicating that determinants other than capital and labor were instrumental to growth outcomes. The second period coincided with prolonged peace, credible macroeconomic programs, and institutional development. - Interpretation caveat: Given data limitations and assumptions about labor force growth, interpretation of labor results is limited. ### Growth accounting results (Table A.1.1) - Table A.1.1 . Sources of Economic Growth (Percent) - 1993–2002 (Average) | 2003–12 - Real GDP growth 8.6 7.4 - Share of factor - Capital 5.7 3.1 - Labor 1.8 1.6 - Total factor productivity 1.1 2.6 - In percent of contribution - Capital66.142.2 - Labor21.022.1 - Total factor productivity12.935.7 ### Remaining challenges and policy priorities - Key goals: - Maintain economic growth and make it more inclusive to achieve durable poverty reduction. - Design an appropriate fiscal regime and framework for natural resource management to hedge against volatility in government revenue, meet infrastructure and social investment needs, and ensure optimal intergenerational allocation. - Support competitiveness of non-natural-resource sectors. - Institutional and structural reform priorities: - Continued capacity-building in public administration for economic analysis, policy formulation, implementation, and monitoring. - Accelerate broad-based business climate reforms to promote private investment and employment-creating activities. - Strengthen agricultural productivity through rural road and irrigation infrastructure, access to electricity, safe water and sanitation, access to agricultural markets and services, improved seed and fertilizer quality, and availability of basic financial services. - Continued investment in human capital to improve health and education outcomes and workforce skills. - Policy coordination: - Strengthen policy coordination at senior and technical levels; many strategy documents are not coordinated within government and implementation is typically slow. ### Appendix 1.1. Growth accounting framework (summary) - Theoretical framework: Cobb-Douglas-type function where real output Y is a function of labor L, capital K, and total factor productivity A. - Key variables and assumptions: - Output: Real output measured by GDP at constant prices (INE). - Labor: Labor input estimated using population and population growth rate as a proxy due to lack of complete employment dataset. - Capital: Capital stock computed from official real investment using the perpetual inventory accumulation method. - Initial capital output ratio assumed to be 1:5. - Depreciation rate set at 6 percent a year. - Capital accumulation equation: Kt – Kt-1 = It – δKt-1. - Factor shares: Assume a factor share of 0.6 for labor and 0.4 for capital. - Estimation period: 1992–2012, with a two-period model for analysis. *Source: Chapter content from the provided IMF PDF content unit.* ### References ### _afr1404 - References ### Megaprojects: key examples and timeline - Cahora Bassa: located on the Zambezi River in Tete Province; 560 feet high by 994 feet wide; equipped with five 415-megawatt turbines; maximum electricity generation capacity of about 2,000 megawatts. Construction started in 1969; reached maximum capacity in 1979; transmission line destroyed in 1980; extensive repairs during 1995–97; full power transmission capacity restored by 1998. A 1,400 km transmission line linked Cahora Bassa to South Africa; about 900 km of that line is in Mozambican territory. - Mozal aluminum smelter: $2 billion investment; first phase completed in 2000 after 2½ years of construction; second phase completed in 2003 doubling capacity. Since completion of the second phase, Mozal has consumed about 900 megawatts of electricity. - Other megaprojects cited: Sasol (onshore natural gas extraction), Kenmare (heavy sands), coal mining projects in Tete (largest operated by Vale and Rio Tinto). - Tabled project capacities, reserves, and timelines (selected): - Mozal I: 245,000 tons; 1998–2000; production 2000. - Mozal II: 245,000 tons; 2001–03; production 2003. - Sasol: 154 GJ; 2002–04; production 2004; 50% expansion 183 GJ in 2011 with ramp up by 2016. - Vale (Moatize mine): 25 million tons per year; 2007–11; production 2011. - Rio Tinto (Benga mine): 45 million tons per year; acquisition in 2011; production 2012. - Under consideration: Anadarko and ENI (Rovuma basin) each 10 million tons per year; construction 2014–19; production 2020. - Mphanda Nkuwa: 1500 MW; 2014–18; production 2018. - Minas de Revuboè: 5 million tons per year; 2013–15; production 2016. - Ncondezi (integrated mine and power): 1.2 million tons per year / 300 MW; mine 2015–2016; power plant 2017. - Baobab Resources (iron ore): 725 million tons (reserves). ### Characteristics of megaprojects (economics) - Common features: - Large-size projects financed by foreign investment; Cahora Bassa was foreign-owned until 2007; Mozal is 96 percent foreign-owned. - Focus on natural resources (hydropower, coal, heavy sands, natural gas). - Capital-intensive: Mozal involved $2 billion investment but employs less than 3,000 permanent and contractor staff; even accounting for an estimated 10,000 indirect jobs, Mozal creates one job per $160,000 of investment. - Export-oriented: Cahora Bassa electricity exported to South Africa or consumed by Mozal; Mozal exports almost all aluminum output. - Investment in specific-purpose infrastructure not always usable by the general public (e.g., HVDC line not connected to Mozambique’s grid; Mozal-constructed railways and port facilities for its own use). ### Contribution of megaprojects to growth and exports - Historical impacts: - Major megaproject start-up years produced a 2–4 percentage point per annum boost to economic growth (examples: 1998–99 relaunching of Cahora Bassa; 2001–03 launch of Mozal). - Share of megaprojects in value added remained stable at above 10 percent even when no major new projects became operational between 2004 and 2011. - Contribution to exports: 60–70 percent of total exports in recent years. - Projected impacts: - Confirmed coal deposits in Mozambique are over 32 billion tons. - Coal production reached 5 million tons in 2012, constrained mainly by railway and port capacity. - Natural gas discoveries in the Rovuma basin; operators plan to start construction of LNG facilities by 2014 and start exporting LNG by 2020. - The value-added share of the coal and LNG sectors projected at about 20 percent of GDP by 2023; share of existing megaprojects projected to decline to less than 5 percent. - Coal and gas contributions to GDP growth projected to average 2 percentage points per year between 2013 and 2023. - GDP growth expected to reach double digits in the years when some LNG trains become operational. - The combined revenue from coal and LNG projected to reach about 10 percent of GDP, or a third of government revenue, by 2030. ### Employment and spillovers - Direct employment: - Mozal has about 1,100 permanent staff and 1,600 contractors (Mitsubishi, 2006). - Mozal contributes about 5 percent to GDP each year but employs only 0.02 percent of the labor force. - Other megaprojects likely to create job numbers on a similar small scale relative to the labor force. - Indirect and temporal employment effects: - Construction phases create significant employment: Mozal reportedly hired 15,000 people during its two construction phases (1997–99 and 2001–03). - Operational indirect jobs via local contractors: Mozal’s spending on Mozambican companies reportedly rose from $5 million to $17 million per month between 2002 and 2007; indirect job estimates around 10,000 (World Bank, 2007), though statistics are not precise. - Spillovers via training and knowledge transfer: Mozal established training and technical capacity-building programs for subcontractors; subcontracting firms showed higher skills and sales growth in 2003 (Warren-Rodriguez, 2008), though causality is not fully established. ### Fiscal contribution and tax regimes - Historical fiscal contribution: - Megaprojects’ contribution to fiscal revenues has been low: on average less than ½ percent of total fiscal revenues during 2007–11. - Early fiscal terms were favorable to foreign companies as the primary motive was to showcase Mozambique as an investment destination post-conflict. - Evolution and projections: - Fiscal legislation for mining and hydrocarbons was revised in 2007 to align more with best international practice; revisions apply to contracts signed since then. - Government plans to reopen discussions on tax treatment for older megaprojects when initial terms expire (typically after 20 years). - Fiscal revenues from megaprojects are expected to increase going forward, but only gradually until LNG production reaches full capacity (2023) because: - Gas companies pay lower corporate income tax in the first 8–10 years of production. - The government’s share in profit from gas increases gradually due to cost-recovery provisions. - Combined revenue from coal and LNG projected to reach about 10 percent of GDP, or a third of government revenue, by 2030. ### Policy implications and recommendations - Broaden the FDI base: - Create an environment conducive to less capital-intensive, more domestically linked foreign investment by addressing gaps in supporting infrastructure and streamlining the regulatory framework to improve rates of return for investors. - Special economic zones and industrial free zones in Beira and Nacala could play a crucial role if investment policies are well designed and implemented. - Fiscal and regulatory framework: - Ensure existing and pipeline megaprojects are brought under an adequate and unified fiscal framework to avoid project-by-project fiscal regimes that may be overly favorable to foreign investors. - Limit the use of tax incentives to attract megaproject investments; adopt and implement adequate fiscal laws for megaprojects and extractive industries. - Leverage megaproject-driven infrastructure: - Encourage megaprojects to build infrastructure that is accessible to other industries where possible (example: Nacala railway line—primarily allocated to coal transport but usable for other cargo and passengers). - Use fiscal space effectively: - Channel fiscal revenues from megaprojects into additional public investment and other expenditures that translate into growth and jobs. - Sustain efforts to apply adequate fiscal frameworks and sound public investment policies for project selection, evaluation, and implementation. - Promote knowledge transfer and local content: - Encourage megaprojects to provide consistent training programs and to use qualified local firms as subcontractors. - Consider government incentives for training programs targeting local small and medium-sized enterprises that are current or potential subcontractors, building on experiences with Mozal-associated programs. ### Contextual and broader indicators - FDI dynamics: - FDI to Mozambique was $65 million in 1997 (less than 2 percent of GDP). - FDI averaged some $400 million to $500 million per year in the 2000s; surge in the late 2000s due to large investments in coal and natural gas sectors. - Ease of doing business: - Mozambique ranks 139th on the 2014 World Bank’s Doing Business Index. *Source: IMF staff and accompanying chapter text in the PDF content unit _afr1404 - References and Chapter "The Role of Megaprojects and Their Relationship to Jobs and Growth" included in that unit.* ### Appendix 2.1. A Small Model of Megaprojects ### Appendix 2.1. A Small Model of Megaprojects ### Model setup - Production efficiency is linked to basic public infrastructure: roads, railway, ports, airports, and access to electricity and water. - Rate of return depends on production function f, public capital k that represents infrastructure, and wage level w. - For a country with adequate levels of public capital, an investor chooses capital input k and labor input l to maximize return on capital: - r1 = max_k ( f(k,l) k / (k l) − w / k ) (expressed in source notation as r f k l k w k l 1 rr 1 fkflkw = max kkk).) - For a country where public capital is extremely low, the investor contributes to infrastructure. With 0 ≤ a ≤ 1 measuring investor contribution to public capital, the rate of return is: - r2 = max_k ( f(k,l) k a k / (k l) − w / k ) (expressed in source notation as r f k l k a k k l 2 rr 2 fkflkw = max kkk),) - If production functions are the same and all else equal, r2 < r1, making projects less competitive in a country with low public capital. ### Conditions for a project to yield higher returns in a low public-capital country - For the project to yield higher returns despite low public capital, one or more of the following must hold (numbering and phrasing preserved): (1) Production is significantly more efficient in the country (f2(.) > f1(.)) (2) Unit labor cost is significantly lower in the country (w2 ≪ w1) (3) Production is not dependent on public infrastructure and therefore the investor does not need to invest in public capital (a → 0) (4) The investment is very large and therefore the additional investment in public capital becomes small (kk) ### Implications for megaprojects versus labor-intensive investments - Capital-intensive megaprojects in the natural resources sector are likely to satisfy conditions (1), (3), and (4): - Production can be more efficient because of the natural resource endowment. - Some natural resource projects require infrastructure for a specific purpose and therefore do not use common public infrastructure. - Large and capital-intensive investments tend to have large k, so their rate of return is less affected by low public capital levels. - Labor-intensive investments: - May benefit from low wage levels. - Generally follow similar production technology and have similar production functions across countries. - Require smaller investments and are more dependent on public capital. - Are less likely to meet the conditions above and therefore are not competitive in countries with low public capital. ### Caveats and additional factors - The discussion is deliberately simplified for illustration and does not cover other factors that could affect investment rates of return, including tax rates and pricing of key inputs (e.g., low energy prices). - Taking these factors into account does not change the conclusion that foreign direct investment in the form of megaprojects is aligned with Mozambique’s competitive advantage. *Source: Appendix 2.1. A Small Model of Megaprojects* ### References ### _afr1404 - References ### References cited - African Development Bank, 2013, African Economic Outlook 2013: Structural Transformation and Natural Resources (Paris: OECD Publishing). - Andersson, Per-Åke, 2000, “The Impact of the Mega Projects on the Moçambican Economy,” Gabinete de Estudos Discussion Paper No. 18. - International Monetary Fund (IMF), 2011, “The Impact of Megaprojects on Growth in Mozambique,” Country Report No. 11/350, Appendix II (Washington). - International Monetary Fund (IMF), 2013, “Republic of Mozambique: Staff Report for the 2013 Article IV Consultation, Sixth Review under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument,” IMF Country Report No. 13/200 (Washington). - Mitsubishi, 2006, “Mozal S.A.R.L. Aluminum Smelting Project,” Mitsubishi Corporation Sustainability Report 2006. - Organization for Economic Cooperation and Development (OECD), 2013, OECD Investment Policy Reviews: Mozambique 2013 (Paris). - Warren-Rodriguez, Alex, 2008, “Linking Technology Development to Enterprise Growth: Evidence from the Mozambican Manufacturing Sector,” Department of Economics Working Paper No. 160, School of Oriental and African Studies, University of London. - World Bank, 2007, “Mozal Plant Spurs Investment and Growth in Mozambique” (Washington). http://go.worldbank.org/D11V8KIN60. - World Bank, 2013, Doing Business Report (Washington). http://doingbusiness.org/. ### Infrastructure and growth — key findings - Infrastructure and growth are closely connected; infrastructure investments can accelerate growth while higher income levels demand better infrastructure. - Calderon and Serven (2004) argue infrastructure has a positive and significant impact on long-run economic growth and contributes to a decline in income inequality. - Recent work covering developed and developing countries: "a 10 percent increase in infrastructure development contributes 1 percentage point to growth in the long term (Calderon, Moral-Benito, and Serven, 2011)." - In sub-Saharan Africa, infrastructure development has contributed about half of the recent acceleration in growth (Calderon, 2009). - Relationship plot statistic: R2 = 0.7927. ### Mozambique — infrastructure development status and constraints - African Development Bank index: Mozambique ranked 11th from the bottom out of 53 countries in 2010. - Geographic and climatic constraints: large country, relatively thinly populated, recurrent harsh weather and periodic flooding. - Infrastructure remains relatively poor in basic services: networked electricity, roads, clean water sources, sanitation, telecommunication, Internet services. - Urban-rural disparities: availability and reliability of infrastructure services are critical to private sector growth; significant urban-rural disparities exist (World Bank, 2012b). - Integrated investment program (Programa Integrado de Investimento — PII) approved September 2013 prioritizes transport, energy, and irrigation; identifies objectives including infrastructure that (1) contributes to Mozambique’s integration and not exclusively to major corridors; and (2) allows Mozambique to maximize benefits from megaprojects, with attention on growth poles along development corridors. ### Transport — status and challenges - Transport infrastructure developed transversally to serve neighboring countries; connectivity between north and south and between transversal corridors is relatively poor (Domínguez-Torres and Briceño-Garmendia, 2011). - Mozambique serves as main transit route for exports for Swaziland, Malawi, Zambia, Zimbabwe, and the Gauteng region in South Africa. - Logistics Performance Index (LPI): Mozambique continues to score relatively poorly. - Global Competitiveness Index: Mozambique ranked 137th out of 148 countries; 10 percent of firms interviewed cited infrastructure as the biggest constraint (World Economic Forum, 2013). - Road network: - Total network: 37,000 kilometers of roads. - Paved: about 6,000 kilometers (most in the primary road network). - Road density: 46 meters per square kilometer. - Condition: poor, particularly in rural areas; road network often the only transport option for large majority of population. - Rail: divided into three essentially independent networks (south, center, north) linking to ports Maputo, Beira, and Nacala; government strategy seeks to link south and north, provincial capitals, extractive areas, agricultural lands, touristic regions, and designated industrial/natural resource areas. - Soft infrastructure constraints in logistics: port clearance time, perceived incidence of bribes, high scanning fees, poor integration of trucking services. ### Energy — status and investment priorities - Electrification: approximately 15 percent of households have access to electricity; about half of these households are in Maputo and other urban areas. - Cahora Bassa dam: generates 2,075 megawatts (or 85 percent of the country’s current energy production capacity), with most power exported regionally. - Hydropower potential concentrated in Tete province; demand likely to increase most in the south and north, highlighting need for investments in generation and transmission. - Priority projects at various stages: gas-fired thermal plant in Ressano Garcia (serve the south); Mphanda Nkuwa dam; transmission line from Tete to Maputo; Cahora Bassa North hydropower plant in Tete; smaller hydropower and transmission lines in the north. ### Water and sanitation — access and impacts - Access: - Safe water: 43 percent of the population. - Adequate sanitation: 19 percent of the population. - Disparities: significant between urban and rural areas; water supply in main cities has improved; rural water supplies remain seriously inadequate. - Health impacts: poor and uneven access responsible for regular outbreaks of cholera and diarrhea, a major cause of child illness and death. - Economic cost: inadequate sanitation is estimated to cost Mozambique over 1.2 percent of its GDP per year. - Delegated management model for urban water being extended to smaller systems; investments needed in fast-growing urban areas (Nacala, Tete, Pemba). ### Irrigation and agriculture - Agriculture employs almost 80 percent of the population. - Irrigation infrastructure rare: about 95 percent of agricultural land is rain-fed. - Less than 50 percent of area developed for irrigation is effectively irrigated. - Potential irrigable land: 3 million hectares. - Actual irrigated: only about 1 percent of that potential is irrigated for food production. ### Public spending and investment patterns - Public spending on infrastructure as percent of GDP comparable to peers in Africa (Figure referenced). - On a per capita basis public spending on infrastructure remains very low and inadequate for needs. - Domínguez-Torres and Briceño-Garmendia (2011): public expenditure needs in Mozambique among highest in the region; significant increase in spending needed to cover infrastructure gap. - Absorptive capacity concerns: large and sudden increases in investment raise questions about labor markets, aggregate demand, and appropriate pace. - Mozambique allocating a large share of its economy to investment (Figure referenced); public investment allocation mirrors this. - Maintenance financing gap: currently allocating less than 20 percent of what would be required to maintain its road network—the highest financing gap in Africa (Domínguez-Torres and Briceño-Garmendia, 2011). - Prolonged high public investment likely to pressure government capacity to maintain investments (roads, health sector, education). ### Investment quality, public investment management, and growth impact - Growth from infrastructure depends on investment quality (Arslanalp and others, 2010; Gupta and others, 2011): "it matters not only how much a country invests, but also how well it invests." - Common failures in public investment: poor project selection, delays, weak procurement, cost overruns, incomplete projects, inadequate operations and maintenance. - Public investment management (PIM) index: countries with stronger PIM systems tend to have higher incomes (Figure referenced). - Mozambique’s PIM score: "scores relatively poorly—slightly below peer countries." - Properly functioning public investment management system features (as illustrated in figure): 1. Guidance & Screening 2. Formal Project Appraisal 3. Appraisal Review 4. Project Selection & Budgeting 5. Implementation 6. Project Changes 7. Service Delivery 8. Project Evaluation - Risks of poor PIM: cost overruns, poor project selection (including undue political interference), implementation delays, neglect of operation and maintenance. - Recommendation: increases in public investments should be made gradually, in line with improvements in public investment management. ### Ongoing and recommended reforms to strengthen public investment management - Current efforts focus on preparing tools to guide project preparation and strengthen institutional setup; reforms are medium-term and will take years to establish robust systems. - Six pillars for implementing successful public investment management (verbatim themes and guidance reflected in text): 1) An appropriate legal framework establishing that all project proposals need to be evaluated before receiving any financing; creating a “national public investment system”; differentiating project proponents and evaluators to avoid conflicts of interest. 2) An institutional set-up to ensure independence of the project evaluation process; proponents and evaluators should belong to different agencies; system should shield evaluators from political interference; Ministry of Planning and Development to facilitate quality assurance. 3) A permanent capacity-building program at different levels focusing on technical capacity for appraisal and evaluation across government; training at three levels: basic for project proponents, intermediate for project evaluators, and advanced "trainers" course. 4) A uniform set of norms, procedures, and methodologies for project preparation and evaluation (including a manual), establishing norms and processes and calculation of main shadow prices (discount rates, foreign exchange, labor, fuel, etc.); incorporate future maintenance needs when evaluating projects’ rates of return. 5) An integrated projects bank (online system with different user levels) to manage information from submission through monitoring; enhances transparency and knowledge management. 6) An ex post evaluation system for projects during implementation and operation, initially focusing on measuring and interpreting indicators and gradually on impact assessment. *Italic: Content derived from _afr1404 - References and the chapter "Infrastructure and Public Investment" (excerpt provided).* ### Conclusions ### Conclusions ### Infrastructure and growth - Infrastructure investments are necessary for sustainable and inclusive growth because of the impact they have on an economy’s productivity. - Despite large investments over the past few decades, infrastructure development in Mozambique is still relatively poor and there remain significant needs in basic access to infrastructure, as evidenced by most international comparisons. - Mozambique has the potential to become a major regional player in both transport services and energy generation and distribution, but large investments will be necessary before it can fulfill that role. ### Current spending levels and absorptive capacity - Current spending levels are still relatively low (on a per capita basis), and increases in infrastructure spending will be necessary to close the existing gap. - Mozambique already has one of the highest investment levels as a share of GDP, and public investment has been growing very rapidly over the past few years. - These trends raise concerns about the government’s absorptive capacity and how it will manage further increases in public infrastructure spending, even acknowledging the wide infrastructure gap. ### Quality of investments and public investment management - The quality of investments is a key determinant in the relationship between public investment and growth. - An effective public investment management system will have a number of features, including: - formal project appraisal, - a system to evaluate and prioritize public investment projects, and - ex post project evaluation that allows for learning and improvements in the preparation and implementation of investment projects. - Mozambique has a relatively weak capacity to manage public investments, and this capacity will be tested by further increases in public investments. - Efforts are under way to improve the public investment management system in Mozambique, but results will only be achieved in the medium to long term. ### Policy recommendation - Mozambique should link further increases in public investment to its ability to enhance its public investment management system. *Source: _afr1404 - Conclusions* ### References ### _afr1404 - References ### Key findings on inclusive growth (general) - Inclusive growth is defined as output growth that is sustained over decades, is broad-based across economic sectors, creates productive employment opportunities for the majority of the country’s population, and reduces poverty noticeably (Commission on Growth and Development, 2008; Ianchovichina and Lundstrom, 2009). - Reductions in excessive income inequality have emerged as a prerequisite for inclusive growth; evidence suggests inequality undermines growth by amplifying crisis risk and limiting poor households’ ability to invest in education (Berg and Ostry, 2011; IMF, 2013). - Preconditions and enablers for high and sustained growth include: - macroeconomic stability; - high rates of private and public investment (including in education and infrastructure) matched by domestic savings; - openness to the global economy; - respect for market signals while retaining policy discretion; - committed, credible, and capable governments. - Macroeconomic fundamentals require policies and structural reforms to ensure sustainable fiscal and current account deficits, a stable debt-to-GDP ratio, low and stable inflation, adequate international reserves, higher public and private investment and savings in physical and human capital, trade liberalization, enforcement of property rights and rule of law, and good governance and transparency. ### Macroeconomic and policy recommendations - Macroeconomic stabilization (moderate inflation and lower output volatility) is a necessary condition for inclusive growth (Anand, Saurabh, and Peiris, 2013). - Quality of investment matters: improve education quality starting at primary and secondary levels and foster an environment for public and private investment in labor-intensive sectors. - Improve institutions and institutional capacity for selection, approval, and execution of public investment projects. - Avoid prolonged overvaluation or undervaluation of the exchange rate; evidence indicates overvaluation hurts growth and employment and undermines structural transformation (Rajan and Subramanian, 2011). Evidence does not support the view that undervaluation is necessarily beneficial for growth (Montiel and Serven, 2009; Anand, Saurabh, and Peiris, 2013). - For agriculture (structural-transformation priority in most low-income countries), policy reforms should: - promote public and private investment in infrastructure and logistics to connect rural areas to markets; - liberalize prices by dismantling price controls, marketing boards, and export taxes; - move away from direct subsidies for certain agricultural products toward subsidies and in-kind provision of agriculture inputs such as fertilizer and seeds; - provide public goods such as basic research, infrastructure, and agricultural extension services. - Fiscal policy can mitigate income losses and prevent excessive increases in inequality during structural transformation: - on taxation, focus on broadening tax bases by reducing tax exemptions, closing loopholes, and improving tax compliance rather than raising tax rates; - among resource-rich countries, improve progressivity of fiscal regimes applied in resource sectors while ensuring project viability and government revenue; - on spending, remove general price subsidies for energy; target education and health expenditures to the needs of the poor; and increase coverage of social protection floors to a larger share of the population. - Protect people rather than jobs to improve equity and resource allocation efficiency. ### How inclusive has growth been in Mozambique? — Findings and diagnostics - Mozambique’s economic performance: - Real GDP per capita almost doubled after 1992. - Mozambique’s economic growth in the past two decades was among the highest in non-fuel-exporting countries in the region. - Mozambique’s growth rate has been the second highest among non-oil-exporting countries in sub-Saharan Africa (averages 1995–2010). - Poverty trends: - Poverty headcount fell from 69 percent in 1997 to 54 percent in 2003; consumption per capita grew by a cumulative 50 percent over the same period. - Rural poverty declined from 71 percent to 55 percent over 1997–2003. - The National Poverty Report (MPD-DNEAP, 2010) indicates the poverty rate in 2008 remained about 54 percent, with rural poverty increasing slightly to 57 percent. - Pro-poor performance and distributional patterns: - Cross-country estimates suggest an average elasticity of the headline poverty rate with respect to growth of real GDP per capita close to 0.20 for Mozambique—well below elasticities observed in China, Viet Nam, or Uganda. - Household survey evidence for 2002–03 to 2008–09 shows growth did not follow an inclusive or pro-poor pattern: households in the bottom three deciles experienced absolute declines in per capita expenditure, while the other seven deciles experienced positive growth. - Pro-poor characteristics of growth appear to be declining over time; poverty numbers stagnated in the new millennium despite relatively high growth. - Structural transformation and diversification: - Growth has not been accompanied by economic diversification; the Herfindahl-Hirschman index shows Mozambique’s export base became increasingly concentrated, reflecting the emergence of megaprojects. - Growth has not yet translated into structural transformation: most of the population remains in rural subsistence agriculture. The share of the population employed in agriculture experienced little change between 2002–03 and 2008–09, suggesting stagnant agricultural productivity. - Sustaining and broadening growth: - If Mozambique’s growth is to become more inclusive, it needs to be sustained, broadened, and diversified over several more decades to match other successful growth cases (successful cases sustained high growth for at least three decades, per the Commission on Growth and Development, 2008). ### Mozambique’s evolving policy response and inclusive-growth strategy - The 2010 poverty survey findings and social tensions (including street riots in late 2010) triggered debate and prompted policy action. - A high-level conference in Maputo in February 2011 engaged government, World Bank, IMF, African Development Bank, bilateral donors, private sector, civil society, and academia; it disseminated practices from China and Brazil and informed policy discussions. - The government adopted a new Poverty Reduction Strategy (Plano de Acção para Redução da Pobreza – PARP) for 2011–14 in May 2011, making inclusive growth the overarching objective. - PARP main pillars: - increasing production and productivity in the agricultural and fisheries sectors; - promoting employment; - fostering human and social development. - PARP supporting pillars: - fostering good governance; - preserving macroeconomic stability. - PARP policy focus aligns with general recommendations: improve agriculture productivity, create jobs via business environment improvements and training, develop more focused social protection programs, and preserve macroeconomic stability. The governance pillar would have benefited from more specific objectives. PARP provided mixed signals on exchange rate policy by stating commitment to promote competitiveness through the exchange rate. *Source: _afr1404 - References (PDF).* ### Box 4.1 . Pillars and Objectives of Mozambique’s ### Box 4.1 . Pillars and Objectives of Mozambique’s Poverty Reduction Strategy for 2011–14 ### Pillars and specific objectives 1. Increase in the production and productivity of the agricultural and fisheries sectors: - Improve competitiveness and market penetration of Mozambican agricultural and fisheries products. - Increase private and public investments in enabling physical and economic infrastructure in order to improve storage, handling, transport, water resource management, banking and insurance services, and market information. 2. Promotion of employment: - Create jobs through improvements in the business environment. - Accelerate regulatory reforms to improve the business climate. - Attract more foreign investment in labor-intensive industries. - Increase public investment in general education to augment basic skills, and in vocational and technical training to augment the employability of local semiskilled workers. - Increase linkages between small and medium-sized enterprises and megaprojects. 3. Fostering of human and social development: - Achieve universal access to seven years of primary education. - Improve social infrastructure, including access to improved water supply and basic sanitation services, urban transport, electricity, and housing. - Expand the coverage of the social protection floor. 4. Fostering of good governance: - Improve access to and quality of public service delivery, the fight against corruption, decentralization and local governance, and consolidation of democratic state building. 5. Preservation of macroeconomic stability: - Sustain reform efforts in public financial management, tax administration, and financial sector development. - Increase the focus on enhancing the public investment architecture and the management of natural resources. ### Assessment and shortcomings - The PARP stopped short of delivering a fully implementable inclusive-growth strategy: beyond general objectives, most pillars lacked specificity about priorities, sequencing, and measurable actions. - Underlying strategies were mostly unfinished and needed to be consolidated. - Channels for interministerial coordination to ensure consolidation delivered a coherent strategy and to ensure accountability in cross-cutting areas were missing. - Data available to measure some proposed performance indicators were of low quality and frequency; shortcomings with poverty and agriculture productivity measures were particularly noticeable. - The lack of a proper performance budget framework prevented budget allocations to specific PARP objectives from being identified and tracked—this has been a common complaint among donors. ### Design features and institutional response - The PARP was designed as a dynamic and flexible document allowing the government to adjust priorities and targets in light of changing economic and social conditions and international developments, and in tandem with the implementation of sectoral strategies. - Objectives and indicators would be updated in the annual Economic and Social Plan and reflected in the Performance Assessment Framework agreed upon with development partners providing budget support. ### Progress observed - Progress in strengthening the design and implementation of the PARP has been broadly satisfactory. - Key strategies finalized in the agriculture and employment pillars, although actions have yet to translate into a clear increase in the production and productivity of small-scale agriculture or in meeting the increasing demand for technical and vocational skills.11 - Significant progress in increasing the coverage and scope of social protection through implementation of new programs and increases in budget allocations.12 - Strong progress in improvements in school enrollment and infant/maternal mortality rates. - Sustained strengthening of tax administration has helped broaden the tax base and improve revenue mobilization. - Shortcomings remain: the expenditure system could be more progressive (e.g., by abolishing energy subsidies), and efforts to improve the selection and prioritization of infrastructure projects need to be stepped up to safeguard economic and social returns. ### Looking ahead — recommendations and next steps - Develop a strong monitoring system with results-based indicators to measure and assess progress more frequently. - The next household survey is planned for 2014–15, and the results should be available by 2016. - The next poverty reduction strategy will be approved by the new government slated to take office in 2015. - More progress in reforming the business environment and public investment management would help accelerate public and private investments and create jobs. - Develop a clear vision of how to leverage the country’s largely unexplored resource wealth in order to transform and diversify its economy. *MOZAMBIQUE RISING — Box 4.1* ### References ### Demographic Factors and Structure of Employment ### Model and assumptions - Simulation period: until 2050, extending Fox and others (2013) methodology. - Sector classification: agriculture, wage industry, nonwage industry, wage services, nonwage services. Nonwage sectors include household enterprises. - Primary data sources for Mozambique: Inquérito aos Agregados Familiares (IAF) 2002 and Inquéritos aos Orçamentos Familiares (IOF) 2008, processed as in Fox and others (2013). - Employment elasticity concept: responsiveness of employment to sector real output growth; employment in each sector projected as employment elasticity × sector real output growth. - Agricultural employment treated residually: employment in industry and services estimated via elasticities; residual labor not absorbed is assumed engaged in agriculture. - Unemployment: methodology does not distinguish agricultural employment from unemployment; Fox and Sohnesen (2013) estimate unemployment rate in Mozambique at about 1.6 percent using strict criteria. - Baseline demographic and economic assumptions: - Population growth: United Nations 2012 Revision World Population Prospects; average annual population growth rate during 2010–50 is about 2.4 percent. - Labor force: LFPR initially set at 89 percent, gradually decreasing from 2020 to 79 percent in 2029, and staying at 79 percent after 2029; average annual growth rate of the labor force in 2010–50 projected at 2.7 percent. - Sectoral GDP growth rates: use assumptions from IMF 2013 DSA baseline until 2033; overall GDP growth rate in 2033 estimated at 7.5 percent; after 2033 output growth rate of each sector kept flat until 2050. - Sectoral employment elasticities: use Mozambique-specific elasticities until 2019 (see Table 5.1 values for Mozambique); during 2020–2023 employment elasticities are weighted averages of current Mozambican elasticities and special LNG-sector elasticities; LNG-sector elasticities assumed 0.2 for wage industry and 0.1 for other sectors; after 2021, elasticities for resource-rich countries from Fox and others (2013) are used. - Table 5.1 reported estimated employment elasticity parameters (selected entries preserved exactly as in source): - Mozambique: Agriculture 1; Wage industry 0.5; Nonwage industry 0.8; Wage services 0.9; Nonwage services 0.8. - Low-Income: Agriculture 1; Wage industry 0.9; Nonwage industry 0.7; Wage services 0.8; Nonwage services 0.8. - Lower-Middle-Income: Agriculture -0.8; Wage industry 0.8; Nonwage industry 0.6; Wage services 0.8; Nonwage services 0.9. - Resource-Rich: Agriculture -1.0; Wage industry 0.6; Nonwage industry 0.7; Wage services 0.8; Nonwage services 0.7. - Upper-Middle-Income (excluding South Africa): Agriculture (blank in table); Wage industry 0.6; Nonwage industry 0.3; Wage services 0.7; Nonwage services 0.6. - South Africa: Wage industry 0.5; Nonwage industry 0.3; Wage services 0.5; Nonwage services 0.5. - Comparators (Asia 1990–2010 / ILO, SSA, 1990–2003 / Vietnam, Cambodia, Bangladesh / Indonesia, Philippines / Low- and Lower-Middle-Income / Upper-Middle-Income) entries in Table 5.1 include, for example: - Agriculture: 0.3, 0.3, 0.7, 0.1 (as tabulated under comparators). - Wage industry: 1.2, 0.4, 0.6, 0.8. - Nonwage industry: 1.1, 0.4, 0.6, 0.8. - Wage services: 0.7, 0.7, 0.8, 0.7. - Nonwage services: 0.7, 0.7, 0.8, 0.7. - LNG sector modeling details: - IMF (2013) assumed production and export of LNG would start by 2020 and increase in scale after that. - LNG production is highly capital-intensive and expected to create few jobs per unit of output growth; employment elasticities for LNG assumed 0.2 for wage industry and 0.1 for other sectors. - During 2020–2023 elasticities computed as weighted average of LNG and non-LNG sector elasticities, weighted by shares of LNG sector and traditional non-LNG sector in total GDP growth. ### Results of the analysis (baseline scenario) - Structural shifts (share of each sector in total labor force; percent, baseline): - Agriculture share declines from about 82.6 percent (2010 value shown in figures) to about 44.5 percent in 2050 (Figure 5.3 values preserved in visual sequence: 80.9, 82.5, 78.8, 75.6, 71.6, 66.5, 62.1, 57.2, 51.4, 44.5). - Wage industry share rises from about 2.5 percent to about 5.2 percent across 2005–2050 sequence shown (2.5, 2.2, 2.3, 2.5, 2.8, 3.3, 3.7, 4.1, 4.6, 5.2). - Nonwage industry share rises from about 1.3 percent to about 6.4 percent across sequence (1.3, 1.7, 1.9, 2.3, 2.8, 3.4, 4.0, 4.6, 5.4, 6.4). - Wage services share rises from about 8.4 percent to about 27.7 percent across sequence (8.4, 7.7, 9.8, 11.5, 13.5, 16.1, 18.4, 21.0, 24.1, 27.7). - Nonwage services share rises from about 6.9 percent to about 16.1 percent across sequence (6.9, 5.8, 7.2, 8.1, 9.3, 10.7, 11.8, 13.1, 14.5, 16.1). - Absolute employment outcomes (millions of workers, baseline; Figure 5.4): - Agriculture: absolute number of workers engaged in agriculture keeps growing over the next 30 years despite declining share; charted values indicate increases from about 8–9 million in 2005/2010 toward higher levels through 2050 (figure shows agricultural workers rising across timeline; exact point values presented visually in the source). - Services and industry sectors expand in absolute terms and will absorb most new entrants, but growth of total labor force outpaces the pace of services and industry employment growth, resulting in continued absolute growth of agricultural employment. - Sensitivity to demographic paths (Figure 5.5): - Upside scenario: population in 2050 larger than UN baseline by 20 percent. - Downside scenario: population in 2050 smaller than UN baseline by 20 percent. - Other assumptions unchanged from baseline. - Results: absolute number of workers in agriculture is somewhat sensitive to demographic path after 2040; slower labor force growth eases pressure on agriculture to absorb entrants, but agricultural employment does not decline and the agricultural sector remains important over the next 20 years. - Note: for simplicity, it is assumed sectoral output growth would not change pursuant to a change of population growth. ### Key findings and projections - Mozambique experienced rapid GDP per capita increase from $132 to $567 over the past two decades, yet remains among the poorest countries; about half the population still lives in poverty. - In 2012 the primary sector (agriculture and fisheries) share of total output was 29.6 percent, and more than 80 percent of the labor force was engaged in agriculture in 2010. - Average annual growth of the primary sector during the decade to 2012 was 7.1 percent, compared with overall GDP growth of 7.4 percent. - Demographics: in 2010 total population about 24 million, about 45 percent were 14 years old or younger; about half the population below working age (15–64). - Under baseline assumptions to 2050: - Share of agriculture in total labor force falls from about 83 percent in 2010 to about 45 percent in 2050. - Industry reaches about 12 percent share by 2050 (industry includes wage and nonwage industry combined). - Services sectors expand substantially in share and absolute numbers, but cannot absorb all new labor-force entrants; absolute agricultural employment continues to grow for at least the next 30 years. ### Policy implications and recommendations - Despite structural shifts away from agriculture, the transition will be slow; services and industry likely cannot absorb all new labor-market entrants over the next 20–30 years. - Because employment in agriculture will keep growing in absolute terms, policy should aim to increase agricultural productivity to improve welfare in rural areas and make growth more inclusive. - Priority policy measures include investments to remove infrastructure bottlenecks in rural areas to raise agricultural productivity. - Monitor unemployment/underemployment carefully: official unemployment metrics may understate labor-market slack; if agriculture cannot absorb new entrants, unemployment problems could intensify. - Structural shifts supported by appropriate policies could change sectoral growth rates or employment elasticities and yield different long-term outcomes; policymakers should track employment-structure transformation and adjust policies accordingly. *Source: Chapter "Demographic Factors and Structure of Employment" and References, Mozambique Rising.* ### References ### _afr1404 - References ### Referenced works - Fox, L., and T. Pave Sohnesen, 2013, Household Enterprises in Mozambique: Key to Poverty Reduction but Not on the Development Agenda? (Washington: World Bank). http://elibrary.worldbank.org/doi/book/10.1596/1813–9450–6570. - Fox, L., C. Haines, J. Huerta Muños, and A. Thomas, 2013, “Africa’s Got Work to Do: Employment Prospects in the New Century,” IMF Working Paper 13/201 (Washington: International Monetary Fund). http://www.imf.org/external/pubs/cat/longres.aspx?sk=40973.0. - International Monetary Fund (IMF), 2013, “Republic of Mozambique: Staff Report for the 2013 Article IV Consultation, Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument,” IMF Country Report No. 13/200 (Washington). http://www.imf.org/external/pubs/cat/longres.aspx?sk=40755.0. - Kapsos, S., 2005, “The Employment Intensity of Growth: Trends and Macroeconomic Determinants,” Employment Strategy Paper 2005/12 (Geneva: International Labour Organization). http://www.ilo.org/empelm/pubs/WCMS_143163/lang--en/index.htm. - United Nations, 2012, “World Population Prospects: The 2012 Revision.” http://esa.un.org/wpp/Documentation/publications.htm. ### Developing the Agricultural Sector — key findings and statistics - Agriculture contributes a quarter of GDP and employs about 80 percent of the workforce. - Crop production represents 78 percent of agricultural GDP; forestry 9.1 percent; livestock 7.1 percent; fisheries 5.6 percent (based on the last agriculture census in 2009). - Agricultural sector growth has averaged about 7 percent per year since 2003. - Total maize production grew by 3.5 percent per year from 2005/06 to 2010/11. - Cassava production grew by 2.5 percent per year over the same period. - Mozambique’s annual population growth is 2.7 percent. - Mozambique remains a net food importer, mainly of rice to supply urban centers. - Yields of rice, maize, cassava, and sweet potato are among the lowest in the region. ### Structural characterization of the sector - The agriculture sector is dominated by crop production and four broad enterprise types: - Small-scale subsistence farmers. - Small- and larger-scale farmers connected to markets. - Vertically integrated agribusiness firms (operating out-grower schemes). - Agribusiness service providers (input suppliers, aggregators). - Cash crops (sugarcane, tobacco, cotton, cashew) account for a small proportion of total area cultivated but represent the vast majority of agricultural exports. - Emerging export-oriented value chains include horticultural crops such as bananas, mangos, sesame, baby corn, and green beans. - Contract farming and out-grower schemes increasingly link smallholders with processing entities or large commercial farms. ### Analysis and policy implications - Developing the agricultural sector requires integrating small-scale subsistence farmers and more market-connected farmers into demand-driven value chains led by agribusiness firms and service providers. - Different actor types face different constraints and require tailored support. - Agricultural transformation is underway, driven by private investment and gradual introduction of commercial models; emerging farmers and agribusiness entrepreneurs can build competitive commodity value chains. - Improving agricultural productivity and making markets more effective will: - Spur growth in exports. - Reduce Mozambique’s import bill for agricultural commodities. - Generate higher incomes for farming households and narrow rural–urban income disparities. *Source: _afr1404 - References (International Monetary Fund).* ### Box 6.1 . Key Findings of Mozambique’s 2010 Agricultural Census ### Box 6.1 . Key Findings of Mozambique’s 2010 Agricultural Census ### Key findings from the 2009–10 Agricultural Census - Cultivated area increased by 24 percent over 1999–2009. - The number of agricultural producers increased by 45 percent over that same period. - The share of women-headed agricultural households increased from 23 percent to more than 27 percent over that same period. - Roughly one-third of farms are smaller than one hectare, while two-thirds are between one and 10 hectares. - Only 5 percent of producers use irrigation, and less than 3 percent use fertilizers. - Sesame is grown on 30 percent of the cash crop area and has become the most important cash crop. - More than 40 percent of producers can neither read nor write. ### Outlook and government strategy (2011–20) - Strategic objective: contribute to food security and producer income in a competitive and sustainable manner that guarantees social and gender equity. - Four strategic pillars and goals: - Agricultural productivity: Increase productivity, production, and competitiveness in agriculture. - Market access: Enhance services and infrastructure for better access to markets within a framework conducive to investment in the sector. - Natural resources: Promote sustainable use of land, water, forest, and fauna resources. - Institutions: Strengthen institutional capacity for the sector. - Targets and focus: - Achieve annual growth in agriculture of at least 7 percent through increased farm productivity and expansion of cultivated area. - Increase area under food crops by 25 percent by 2020 (in combination with productivity improvements). - Promote an enabling environment for stronger private sector participation and prioritize public investments in areas of strong economic potential (six development corridors identified). - Implementation instrument: agricultural sector investment plan (Programa Nacional de Investimento do Sector Agrário — PNISA), aligned with CAADP/NEPAD. ### Policy and investment priorities — Seed technology - Less than 10 percent of Mozambique’s staple crop area is planted with certified seed. - DNSA backlog and capacity constraints: backlog of more than 80 varieties awaiting registration (2011); less than half of the seed production areas were inspected; laboratory testing met only about half of the demand. - Need: incentives for private participation, enforcement of seed variety release and quality control, protection of plant breeders’ intellectual property, and promotion of links between private companies and public research institutions. ### Policy and investment priorities — Fertilizer - Fertilizer use in nutrients applied: 4.3 kilograms per hectare (compared to 9.5 kilograms in Ghana and 8.2 kilograms in Ethiopia). - Abuja Declaration target for sub-Saharan Africa: 50 kilograms per hectare by 2015. - Constraints: high fertilizer prices in rural areas, inefficiencies in supply chain and distribution, high transport costs, cash-flow constraints for smallholders, and large package sizes limiting access. - Past interventions: 2009 voucher-based input subsidy scheme (25,000 farmers received inputs sufficient to plant 0.5 hectare of maize or rice); program concluded after two years and is under evaluation for scaling up. - Needed reforms: phase out market-distorting government seed distribution (except emergencies), support private distribution networks, update and enforce fertilizer industry rules and regulations, and promote private–public links for seed and fertilizer. ### Policy and investment priorities — Irrigation - Irrigated area: only 40 percent of the 120,000 hectares developed for irrigation is effectively irrigated. - Composition of effectively irrigated area: sugarcane accounts for some 60 percent, smallholder horticulture 18 percent, and rice 10 percent. - Since 2004, an estimated 15,000 hectares of irrigation infrastructure have been rehabilitated or newly built. - Institutional measures: adoption of the National Strategy for Irrigation (December 2010) and creation of the National Irrigation Institute (INIR). - Major project: PROIRRI Project, funded by the World Bank’s International Development Association, with a $70 million budget. - Priorities for irrigation subsector: 1. Enhance management of irrigation assets with focus on cost recovery and promotion of water-user associations. 2. Improve legal and regulatory framework on water for agriculture and enforcement of the land law to clarify land-use rights and promote access to irrigation. 3. Establish institutional linkages between public entities and beneficiaries through public-private partnerships for irrigation development. ### Policy and investment priorities — Land - Implementation gaps: land administration capacity weak; rural land taxation system has very low tax levels and very low collection rates (between 16 and 33 percent). - Land demand and DUATs: - Land area covered by applications for DUATs increased more than five times from 2005 to 2009. - Rural DUATs do not enjoy the same transferability as urban DUATs. - Moratorium on DUAT attribution for areas greater than 1,000 hectares imposed between 2009 and 2011. - Government actions and projects: - Approved the donor-supported Community Land Initiative (Iniciativa de Terras Comunitárias). - Included number of completed community delimitations as an indicator in the G19 Performance Assessment Framework. - Launched a land project financed by the Millennium Challenge Corporation with a $39 million budget focused on policy monitoring, capacity strengthening, and improving land access in selected provinces. - Creation of the National Land Consultative Forum in 2011. - Removal of uncertainties related to documentation from the 2007 Amendment of Article 35 of the Land Law. - Increase in rural land tax level (effective 2010). - Priorities: 1. Enforce and upgrade the land taxation system to pursue social goods and increase local government revenues. 2. Strengthen protection of community land rights through scaling up community delimitation, increasing transferability of rural land-use rights, and improving rural zoning and land use planning. 3. Develop a comprehensive strategy to strengthen land administration capacity at all levels. - International guidance: government intention to adhere to the Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests. ### Market access, business environment, and financial services - Agribusiness constraints identified: licensing procedures, employing workers, obtaining credit, paying taxes, accessing marketing infrastructure, trading across borders, and enforcing contracts. - Priority constraints highlighted by stakeholders: - Improving access to and affordability of finance. - Improving input supply availability, adequacy, and quality. - Rehabilitating roads and bridges linking high-potential agricultural areas. - Structural change in value chains: emergence of value chains conducive to small and medium enterprises and smallholder participation (rice, oilseeds, poultry, bananas, mangos, green beans). - Government commitments under PNISA: - Consistency and transparency in trade policy. - Incentives for private sector involvement in domestic input policies. - Improving transparency and efficiency of land administration. - Developing methods to increase access to credit for smallholders, including authorization of an agricultural commodity exchange (decree published October 2012) and exploration of a warehouse receipt system. - Financial sector facts: - Agriculture contributes 25 percent to GDP. - Lending to agriculture fell from 20 percent of commercial lending in 2000 to 6 percent in 2010. - Only 2.3 percent of producers report having access to some form of credit. - Travel to financial institutions: almost half of formal-service users in rural areas spent more than two hours to reach their institution; more than a third spent more than three hours or even had to travel overnight. - Cost of agricultural credit: 25–30 percent per annum, plus fees and commissions of up to 3 percent, plus transaction costs. - Rural finance strategy: Strategy for Rural Finance (EFR 2011–17) approved April 2011 to develop an inclusive financial system in rural areas. - Observations: most rural credit moves through government- or donor-funded credit lines and guarantee funds; microfinance in rural areas is underdeveloped; positive trends in credit for well-structured value chains. ### Nutrition - Chronic undernutrition remains a serious constraint on human capital and economic growth with little improvement over the past decade. - Ministry of Health (MISAU) strategy: food fortification, targeted vitamin and mineral supplementation, and dietary diversification. - Salt iodization: 60–70 percent of salt produced or processed at scale is iodized. - Government exploring large-scale fortification of wheat flour and edible oil; challenges include coordinating across ministries and ensuring compliance, especially among small-scale producers and processors. ### Sector management, statistics, and coordination - Agricultural statistics and surveys: - National Census for Agriculture and Livestock (Censo Agro-Pecuário) conducted every 10 years by INE and MINAG; last census conducted in 2009–10 with a comprehensive volume published in 2011. - Official annual agricultural statistics primarily from two MINAG surveys: postharvest agricultural survey (Trabalho do Inquerito Agricola — TIA) and early warning crop forecast survey (Aviso Previo); these will be combined into one survey exercise. - Statistical capacity and data priorities: - PESEN 2008–12 did not include agricultural statistics; MINAG with FAO drafted a Master Plan for Agricultural Statistics. - Master Plan highlights the need to: - Make agricultural production data an integral part of the agricultural sector strategy. - Improve coordination among different players and increase institutional efficiency. - Agree on a core set of indicators for annual data collection. *Source: INE (2011), 2009–2010 Agricultural Census.* ### Conclusions ### Conclusions ### Need for agricultural growth and competitiveness - An acceleration of growth in agriculture is needed to reduce poverty and remain competitive in meeting Mozambique’s growing food needs and export opportunities. ### Policy and institutional reforms - Supported by development partners, the government is currently implementing a number of key policy and institutional reforms that will provide incentives for private investment and facilitate the integration of smallholder farmers into value chains. - The sector investment plan, however, is ambitious and will require careful management. - With the underlying policy intention of attracting private investment, public resources will need to be allocated strategically. ### Role of development partners and financing - Development partners are and will be supporting the technical execution of key components of the agricultural sector investment plan (PNISA) through project-based funding, both on and off budget. - The World Bank is also providing the sector with policy-based lending, supporting most aspects of the policy agenda outlined in this chapter and providing flexible resources to the government. - In addition, development partners are in the process of identifying PNISA management support requirements (including analytical capacity) and the annual sector review, policy dialogue, and resource allocation process. ### Data usage note - Aviso Previo data are used for early warning but also by default for the evaluation of MINAG’s annual Social and Economic Plan, whereas data from TIA have been used extensively by MINAG to analyze the agricultural economy and set priorities for research and agricultural investment. See MINAG and INE (2011). * _afr1404 - Conclusions_* ### References ### References ### Cited works (selected) - Instituto Nacional de Estatistica (INE—National Statistics Institute), 2011, “Censo Agro-Pecuário 2009–2010” (Maputo). - Justiça Ambiental and União Nacional de Camponeses, 2011, “Lords of the Lands: Preliminary Analysis of the Phenomenon of Land Grabbing in Mozambique” (Maputo, March). - Ministry of Agriculture (MINAG) and National Statistics Institute (INE), 2011, “Government of Mozambique: A 10-Year Master Plan for Agricultural Statistics for Mozambique, 2012–2022” (Maputo, October). - Ministry of Agriculture (MINAG) and Michigan State University (MSU), 2013, “Government of Mozambique: Flash No. 63E, Agricultural Marketing and Development in Mozambique: Research Findings and Policy Implications” (Maputo, June). - Ministry of Finance, 2012, “Government of Mozambique: Mozambique Financial Sector Development Strategy, 2012–2021” (Maputo). - Oakland Institute, 2011, “Understanding Land Investment Deals in Africa.” Country Report: Mozambique (Oakland, California). - USAID (United States Agency for International Development), 2011, “AgCLIR Mozambique: Commercial, Legal, and Institutional Reforms in Mozambique’s Agriculture Sector” (Washington, August). - World Bank, 2012, “Agribusiness Indicators—Mozambique” (Washington, February). http://documents.worldbank.org/curated/en/2012/04/16374790/agribusiness-indicators-mozambique. ### Mozambique’s development corridors — key findings and analysis - Development corridor concept: - Evolved from transport corridors to integrated investments in hard infrastructure plus policies, regulations, and institutions governing trade and investment along corridors. - Often anchored on road and rail networks linked to ports and large anchor projects, frequently mineral-based. - Envisions significant private sector roles alongside central and local public authorities to remove regulatory and political barriers to flows of goods, people, and services. - Regional context: - RSDIP identified 21 development corridors covering 16 countries; RSDIP actively involved in eight corridors including Beira, Limpopo, and Maputo (Mozambique). - North-South Corridor covers Botswana, DRC, Malawi, Mozambique, South Africa, Tanzania, Zambia, and Zimbabwe; Central Corridor links Tanzania, Uganda, Rwanda, Burundi, and DRC. - Growth pole criteria: - Success factors include (1) geographical concentration of economic activities, (2) demonstrated private sector investments, and (3) capacity for generating sustained growth due to local factor endowments. - World Bank supporting growth pole investment programs in Burkina Faso, DRC, Madagascar, and Mozambique. ### Maputo Development Corridor (MDC) — outcomes and constraints - Key features and investments: - EN4/N4 toll highway (build-operate-transfer concession), rehabilitation of Ressano Garcia railway line, Lebombo-Ressano Garcia border post, redevelopment of Maputo and Matola ports (PPP concession), Sasol gas pipeline. - Maputo Corridor Logistics Initiative (MCLI) established in 1994 provided public-private institutional support. - Anchor projects and scale: - Mozal started in 1998. - Mozal and Sasol have invested over $2 billion and $800 million, respectively. - Mozal contributes over 48 percent of Mozambique’s industrial output and 28 percent of manufacturing value added; it represents 75 percent of manufacturing exports, 60 percent of all exports, and 42 percent of the country’s total export revenues. - Performance issues: - Road and rail capacity underutilized; Mozambican segment has seen little growth compared to South African segment. - Constraints include difficulties in railway concession, poor investment climate, inefficiencies in cross-border logistics (proposed one-stop border post not yet operational), and competitive investments in Durban and Richards Bay ports. ### Nacala Development Corridor — investments, capacity, and risks - Geographic and demographic scope: - Corridor covers Tete, Zambezia, Niassa, Nampula, and Cabo Delgado with a total area of over 499,000 square km and a population of about 14 million. - Major investments and timelines: - $3.4 billion investment by a consortium led by Vale for rehabilitation of the 912 km railway line from Moatize (Tete) to Nacala port (including Malawi); railway expected to be completed by late 2014 or early 2015. - $1.1 billion investment by Vale in a new port at Nacala Velha to be completed at the same time as the railway line. - Construction of a large airport scheduled to be opened in 2014. - Upgrading Nampula-Cuamba and Cuamba-Mandimba-Lichinga roads (currently dirt roads). - Upgrading the existing Nacala port. - Development of the Nacala Special Economic Zone established in 2007. - Investment commitments and projections: - Total investment commitments to date are $1.2 billion for 53 approved investments, with some agro-processing firms already operating. - Rail capacity on the Nacala Corridor is expected to increase to 18–20 million tons by 2017, and eventually to 30 million tons. - Energy and resource prospects: - Discovery of natural gas deposits in the Rovuma Basin north of Nacala could further stimulate the corridor. - Tete has 23 billion tons of identified coal reserves; coal production is expected to reach 62 million tons in 2017 and 75 million tons in 2020. - Institutional and capacity constraints: - Absence of an effective institutional platform to plan, coordinate, monitor, and manage corridor expansion. - Institutional capacity of Zambezi Valley Development Agency, the Special Economic Zones Authority (GAZEDA), and provincial/municipal authorities (including Nampula UCODIN) described as weak and needing rapid ramp-up. - Critical needs: public investments in infrastructure (roads, water, energy), improved service delivery, labor skills, investment climate, land-use planning, sustainable natural resource management, and implementation of social and environmental safeguards. ### Beira Development Corridor and BAGC - Corridor scope and transport links: - Traditionally the link between Beira port and Zimbabwe; expanded to include roads from Beira to Malawi and Zambia and the rail link to Tete. - Key links: Zimbabwe (road EN6, railway, pipeline); Malawi (road EN102/103 and Sena railway link to Moatize); Zambia (road EN102/221). - Port and rail capacity: - Sena rail line redeveloped and reopened in June 2010 to facilitate coal exports; operations in 2013 were disrupted by flooding and political violence. - Plans to expand Beira port and increase Sena line rail capacity from current 6 million tons to 20 million tons per year; natural constraints: Beira is relatively shallow with a long access channel not navigable for large ocean-going ships. - Nacala is a deep sea port better suited for bulk cargo such as coal. - Plans exist for a new rail line from Tete to Macuse and a new multiuser deep sea port. - Beira Agricultural Growth Corridor (BAGC): - Launched in 2010 as a partnership between the government of Mozambique, private investors, farmer organizations, UK Department for International Development, Norway, and the Netherlands. - Focus on Tete, Sofala, and Manica Provinces to promote investments in commercial agriculture and agribusiness. - BAGC Catalytic Fund supports farming and agro-processing investments; partnership with Alliance for a Green Revolution in Africa supports irrigation and smallholder support services. - Shared challenges with Nacala: - Institutional capacity for planning, coordination, and management. - Critical timing, scope, and sequencing of infrastructure investments. ### Addressing challenges, spillovers, and policy recommendations - Observed mismatch between megaprojects and local development: - Megaprojects represent 62 per cent of the production value of the manufacturing sector but account for only 3 per cent of the sector’s labor force and 2 per cent of urban private sector employment (Ministry of Planning and Development, 2012). - Limited fiscal benefits due to prevailing investment incentives. - Key constraints to capture spillovers and create jobs: - Weak domestic private sector: poorly organized, largely informal, limited business and financial capacity. - Agribusiness constraints: high cost of business, infrastructure gaps in irrigation, energy and roads, low labor productivity, lack of credit, extension, and standards certification services. - Local SMEs unable to meet quality and procurement standards of large investors and lacking business and management expertise. - Recommended policy actions (themes and instruments): - Establish public-private institutional platforms (MCLI cited as successful model) to plan, coordinate, monitor, and manage corridors. - Targeted integrated interventions to: - Improve the business environment. - Upgrade access to infrastructure and skills. - Strengthen capacity of public sector institutions and the domestic private sector. - Enhance land-use planning and sustainable natural resource management. - Implement social and environmental safeguards. - Public investments needed in roads, water, energy, and service delivery to ensure spillovers raise incomes and reduce poverty. - Donor and multilateral support: - World Bank’s Integrated Growth Poles Project ($100 million approved in April 2013) aims to support authorities in addressing medium-term challenges. ### Financial inclusion (selected indicators and trends) - Demand-side exclusion: - According to the FinScope 2012 survey, 75 percent of micro, small, and medium-sized enterprises (MSMEs) are financially excluded (FinMark Trust, 2013). - Supply-side developments: - Bank of Mozambique index of financial inclusion (0–100 scale) rose from 9.2 in 2005 to 13.1 in 2012. - Number of branches of credit institutions rose from 228 in 2005 to 502 in 2012. - Geographic coverage: number of entities per 10,000 km2 increased from 2.9 in 2005 to (value cut off in supplied content). * _afr1404 - References_ ### 6.6 in 2012. ### _afr1404 - 6.6 in 2012. ### Financial sector structure and depth (end-2012) - Composition of the financial sector by end-2012: - 18 banks - eight microbanks - seven credit unions - 11 savings and loans organizations - 202 microcredit operators - one electronic money institution - 3,051 mobile banking agents - Financial depth indicators: - Private sector credit to GDP: 13.2 percent in 2005 to 28.8 percent in 2012 - Broad money to GDP: 28.9 percent in 2005 to 45.6 percent in 2012 - Distribution of financial inclusion by province: - Maputo city index of financial inclusion at end-2012: 91.8 - Many other provinces remained with very low access to financial services - International comparison (index scale 0–100): - Mozambique’s index outperformed Angola and Madagascar in 2010, but performed poorly compared to Seychelles, South Africa, and Botswana - Countries with an index less than 30 are regarded as low financial inclusion countries; Mozambique is included in this group ### Demand-side trends and usage - Account and service usage (2005–2012): - Share of adults holding at least one deposit account: 6 percent in 2005 to 20 percent in 2012 - Share of adults holding at least one credit account: 0.3 percent in 2005 to 3.9 percent in 2012 - MSME and household use (FinScope surveys): - 2012 FinScope MSME survey: 25 percent of MSME owners used financial products or services to manage their businesses - 2012 FinScope MSME survey: 11 percent of MSME owners used some form of formal financial service - 2009 FinScope consumer survey: 22 percent of households used financial products or services to conduct their personal finance ### Credit allocation and sectoral bias - Credit boom characteristics: - The increase in private sector credit has been mainly financing household consumption and services - Agriculture and industry—sectors employing over 80 percent of the labor force—were largely excluded from the credit expansion ### Key barriers and demand-side constraints - Income and usage constraints: - 55 percent of MSMEs were prevented from opening a bank account due to problems related to low and irregular incomes (FinScope 2012) - Geographic and logistical constraints: - 63 percent of MSME owners in rural areas have to travel more than one hour to get to the nearest bank - “Banks are too far” cited by 19 percent of MSME owners as a barrier - Cost and risk perceptions: - Only 5 percent of MSME owners borrowed money or took goods on credit for business purposes in the 12 months before the FinScope Survey - Of that 5 percent, only 1 percent borrowed from a commercial bank - 42 percent of MSME owners did not borrow mainly for fear of not being able to pay the loan back - MSME readiness and bank lending model mismatch: - 87 percent of MSMEs would meet the requirement of being in operation for more than a year - 46 percent of MSMEs would meet the requirement of having collateral - Only 6 percent of MSMEs have formally registered their business - Only 2 percent of MSMEs have a business plan - 18 percent of MSMEs keep financial records - As a result, traditional banking credit requirements exclude many MSMEs perceived as risky ### Government reform program: Financial Sector Development Strategy (2013–22) - Strategic objective: - Remove main obstacles for formal financial services to reach the broader population; improve financial access and support inclusive growth - Proposed policy actions: - Promote competition in the banking sector - Top three banks account for more than 80 percent of banking system assets - Greater competition could lower interest rates and diversify financial services - Foster mobile banking - Reduce transaction and travel costs for rural customers through mobile banking services - Regulatory framework and market-friendly regulation (including interoperability) are important for effective outcomes - Improve bank–MSME linkage - Actions to strengthen MSMEs’ ability to apply for credit rather than distorting financial markets - Establish a moveable collateral registry - Create private credit registry bureaus to provide banks with borrower information to facilitate risk assessment - Complementary policies: - Provision of basic infrastructure (telecommunications and electricity) in districts with economic potential - Implementation of financial literacy programs for rural households and MSMEs - Acceleration of decentralization of government budget execution to rural areas to stimulate liquidity - Promotion of agricultural insurance programs to smooth rural income volatility - Improving the collateral framework to widen assets usable as collateral (including nonstandard assets such as crops and livestock) - Donor engagement and financing: - World Bank approved the first Programmatic Financial Sector Development Policy Operation to Mozambique for $25 million in September 2013 - International Monetary Fund providing technical assistance in financial sector surveillance, payment systems, and money market development - KfW assisting to establish a deposit insurance fund and, together with the World Bank and the UK Department for International Development, sponsoring the Financial Sector Deepening Trust Fund to support development of a deeper, broader financial sector, particularly in rural areas ### Mobile banking developments (Box 8.1) - Current operators and reach: - Two mobile banking operators in Mozambique: mKesh and m-Pesa, licensed in 2010 and 2013, respectively - These operators have so far reached over 150,000 customers and are expanding rapidly - Service capabilities and impacts: - Phone-based accounts allow deposit withdrawals, money transfer, and payments - Evidence from southern Mozambique: financial literacy and trust outcomes were positively affected by introduction of mobile banking (Batista and Vicente, 2012) - Mobile money increased marginal willingness to remit and substituted traditional alternatives for savings and remittances - Regulatory and operational priorities: - Establish the legal framework for mobile banking - Ensure market-friendly regulation and interoperability between mobile money providers to broaden use ### Conclusions and policy implications - Financial inclusion is a key pillar of the authorities’ inclusive growth strategy - Despite expansion of banking institutions and services, most households and MSMEs remain financially excluded - The Financial Sector Development Strategy aims to increase access to and efficient use of financial services, but success requires: - Effective coordination between authorities and donors - Complementary structural reforms addressing: - Low productivity and incomes in rural areas - Geographic distribution of households - Low managerial capabilities of MSMEs - These constraints negatively affect both bank expansion into rural areas and the ability of individuals and businesses to use existing financial services *Source: Bank of Mozambique; FinScope surveys; Financial Sector Development Strategy (2013–22); World Bank; International Monetary Fund; KfW.* ### References ### _afr1404 - References ### Context and motivation for a Social Protection Floor (SPF) in Mozambique - Mozambique experienced fast economic growth over the past two decades but recent challenges have limited poverty reduction and highlighted the need for policies focused on inclusive growth. - The Social Protection Floor (SPF) Initiative was adopted internationally (United Nations, April 2009) and Mozambique became a pilot country through coordinated international engagement involving World Bank, ILO, UNICEF, Oxford Policy Management, and IMF analysis. - Collaborative outputs led to adoption of a new National Basic Social Security Strategy (ENSSB) and an Operational Plan. ### Poverty, labor market structure, and vulnerabilities - Absolute poverty rate stagnated at 54.7 percent in 2008/09 (National Poverty Assessment Report). - Economically active population estimated at around 11 million people: - more than 60 percent self-employed, - around a quarter unpaid family workers, - 10 percent salaried employees (4.1 percent civil servants and 6.8 percent in the private sector). - Around three-quarters of the workforce engaged in the informal economy and a similar proportion works in agriculture, largely as subsistence farmers. - Household Budget Survey (INE, 2008/09) indicates high vulnerability to aggregate shocks (droughts, cyclones, floods, fuel and food price variations) and idiosyncratic shocks (demographic structure, inability of breadwinners to participate in labor market). - World Bank Social Protection Assessment (2012) shows little difference in food and nonfood average consumption levels across the first four wealth quintiles, complicating targeting by income/consumption/asset indicators. ### Household demographic and labor-capacity classification (Table 9.1) - Total distribution of household types (percent): - Permanently labor-constrained: Elderly, no able-bodied: 8.1; Chronically ill/disabled, no able-bodied: 0.2 - Temporarily labor-constrained: Child-headed: 0.1; All able-bodied temporarily unable to work: 1.5 - Not labor-constrained: Female-headed: 20.2; Male-headed: 69.9 - Total: 100.0 - Household dependency ratio: Total 4.5; Urban 0.6; Rural 2.5 (as presented in table format). - Average size and demographic indicators preserved as in source table. ### Key challenges prior to reform - Low coverage of social protection overall; social insurance mechanics limited to certain economically active categories and implementation gaps reduced effective coverage. - Noncontributory programs were mainly centered on the Food Subsidy Program (PSA), leaving many poor households with working-age members and families with children and youth excluded. - Program fragmentation and duplication across multiple governmental and nongovernmental institutions with distinct funding and mechanisms hinder scale and coordination. - Operational capacity constraints: human resources, management, and information systems; processes for identification, selection, and payment of beneficiaries leading to high administrative costs. - Significant institutional capacity-building required for progressive, sustainable, and efficient extension of coverage. ### ENSSB objectives and Operational Plan design (2010–14) - ENSSB three main objectives for 2010–14: - (1) extending coverage and impact of interventions; - (2) increasing efficiency of the system; - (3) assuring coordination of different programs and services. - Principle of universal coverage and organization into four intervention areas: direct, health, education, and productive social action. - Strategic Operational Plan for Basic Social Security approved by Council of Ministers in September 2011. ### Program mix in the Operational Plan (Table 9.2) — program descriptions and parameters - Programa Subsidio Social Básico (PSSB) - Eligible: Permanently labor-constrained households (elderly, no able-bodied adult; chronically ill/disabled, no able-bodied adult). - Type of transfer: In cash. - Frequency: 6 (bimonthly) payments per year. - Monthly transfer value formula: One-third of the poverty line for the main beneficiary, plus 0.25% of the main benefit for each dependent household member up to a maximum of four dependents. - Monthly transfer amount (2013): MT 253 (main benefit) + MT 63 per dependent. - Additional targeting: Households in the poorest four quintiles of the total population. - Programa de Apoio Social Directo (PASD) - Eligible: Temporarily labor-constrained households + households facing shocks (child-headed where head age ≥ 12; adult members temporarily unable to work; elderly/disabled/chronically ill bedridden with no able-bodied adult; adult members on ART and severely acute malnourished; severely acute malnourished children; facing a temporary shock). - Type of transfer: In kind (basic food basket) and one-off support for temporary shocks. - Frequency: Varies (monthly for ongoing cases). - Monthly transfer amount (2013): Average value of MT 985 for basic food basket (proposal to adjust composition to household size). - Additional targeting: Households in the poorest four quintiles of the total population. - Programa de Apoio às Unidades Sociais - Eligible: Household members in need of institutional care (children in need and street children; elderly and disabled without support; victims of domestic violence and abuse; repatriated households). - Type of transfer: Institutional care. - Frequency and transfer amounts: Not applicable / Not applicable. - Programa de Acção Social Produtiva (PASP) - Eligible: Non-labor-constrained households with at least one able-bodied adult. - Type of transfer: Cash for work (direct employment in public works), training programs. - Frequency: Rural: 4 (monthly) or Rural: 15% / 25% targeting descriptions; Urban: 6 (monthly). - Monthly transfer amount (2013): MT 650 (value of the poverty line fixed per household). - Additional targeting: Rural: 15% or 25% of households identified with a combination of geographical, category-based, and poverty targeting; priority to female-headed households; households with elderly, disabled, or chronically ill members; households with malnourished children; households with high dependency rates; and foster families. ### Coverage and cost projections (Tables 9.3 and 9.4) - Operational Plan coverage projections for numbers of households (2012–2014): - PSSB: 2012: 280,244; 2013: 287,637; 2014: 311,238 - PASD: 2012: 37,243; 2013: 46,617; 2014: 58,029 - Programa de Apoio às Unidades Sociais: 2012: 2,159; 2013: 2,253; 2014: 2,351 - PASP: 2012: 174,994; 2013: 295,629; 2014: 443,363 - Total households: 2012: 494,640; 2013: 632,136; 2014: 814,981 - Estimated total cost of current government proposal (millions of MT; percent of GDP) — preserved per table: - PSSB: 2012: 1,303 0.30; 2013: 1,473 0.29; 2014: 1,707 0.30 - PASD: 2012: 291 0.07; 2013: 393 0.08; 2014: 499 0.09 - Programa de Apoio às Unidades Sociais: 2012: 54 0.01; 2013: 72 0.01; 2014: 86 0.01 - PASP: 2012: 848 0.20; 2013: 1,507 0.30; 2014: 2,348 0.41 - Total: 2012: 2,475 0.58; 2013: 3,425 0.69; 2014: 4,617 0.81 ### Alignment with SPF guarantees and design principles - Four key principles orienting the reform: - Establish an integrated and comprehensive system routing poor and vulnerable households to different programs based on capacity to work. - Strict conceptual separation between actions for labor-constrained and non-labor-constrained households. - Conditioning cash transfers to engagement in work activities (cash for work) for poor non-labor-constrained households. - Targeting households (not individuals), using the referential individual as an entry point to cover all household members. - Progress toward SPF guarantees: - Guarantee (a) income security for elderly, disabled, and chronically ill: provided by PSSB for labor-constrained households and indirectly extended via PASP to non-labor-constrained household members. - Guarantee (b) basic income security for children: provided indirectly via PSSB and PASP; concern that PASP is not adjusted for household size may reduce per capita support for children in larger households. - Guarantee (c) income security for persons of working age unable to earn sufficient income due to unemployment/underemployment: PASP is an important step, effectiveness depends on scale and coverage; PASD contributes for temporary inability to work (maternity, sickness) but coverage limited to cases where such persons are sole breadwinners. ### Fiscal space assessment and medium-term prospects - Fiscal space can be created by increasing overall spending envelope (higher revenues, more external grants, more borrowing) or reprioritizing within a given envelope. - Mozambique increased fiscal revenues by 6 percent of GDP during 2008–11 via tax administration reforms; foreign aid financed about one-third of the budget. - Revenue collection projected to rise by 0.2 percent of GDP per annum over 2012–22 (conservative scenario based on IMF (2013), assuming no significant revenues from nascent natural resource sector during simulation horizon). - On net, anticipated factors would contribute 1.2 percent of GDP to enhancing the overall spending envelope over 2012–22 as revenue increases offset projected decline in grants. - Government aims to reprioritize spending by phasing out fuel subsidy (accounted for 1.1 percent of GDP in 2011 and estimated 0.6 percent in 2012); full phasing out would free resources. - Total additional fiscal space estimated at 2.3 percent of GDP during 2012–22 from revenue increases and spending reprioritization. - Potential further enhancements: revenues from booming natural resource sector (subject to infrastructure, fiscal regime modernization, and budget integration) and increased donor support. *Source: Cunha and others (2013); Ministry of Women and Social Welfare, Operational Plan (2011); IMF staff compilation and estimates.* ### 0.8 percent of GDP is envisaged for 2014–16. Depending on the progress ### _afr1404 - 0.8 percent of GDP is envisaged for 2014–16. Depending on the progress ### Policy Scenario A: The Current Government Proposal up to 2022 - Scenario depicts targets approved by the government in the Operational Plan (accounting for delays in disbursements and implementation in 2012). - Main coverage increase concentrated in the PASP after 2016 via increased take-up. - Projected coverage and costs: - PASP reaches just above 1 million beneficiary households in 2022. - PSSB focuses on permanently labor-constrained households and should not exceed 400,000 households (after screening out households in the highest quintile or those receiving a formal pension). - PASD is estimated to reach about 130,000 beneficiary households at full scale. - Fiscal consistency: - Baseline scenario is consistent with the IMF’s medium-term fiscal framework for 2012–17 and debt sustainability analysis with a longer time horizon. - Leaves room for investment and other important spending categories. - For years beyond 2017, government needs regular assessment of costs and affordability of increasing existing transfers, considering progress in capacity-building and capital investment for service delivery. ### Policy Scenario B: Program Restructuring beyond 2015 - Trigger: After 2014, government assessment of the National Basic Social Security Strategy and Operational Plan may lead to policy changes. - Scenario aligns with recommendations from the World Bank’s Mozambique Social Protection Assessment (World Bank, 2012). - Proposed second-phase SPF structure centers on two pillars: - A social pension to focus on the poor elderly, persons with disabilities, and the chronically ill. - A child benefit program to focus on poor households with children and child-headed households. - Programmatic shift: - Delink allocation from alternative support mechanisms and the assessment of residual labor capacity. - Simulates almost universal coverage of some benefits to align more closely with the three income security SPF guarantees. - Fiscal implication: - Cost will rise significantly after 2017 compared to the baseline. ### Key Findings and Projections - Initial resource envelope: 0.8 percent of GDP is envisaged for 2014–16. - Coverage projections under Scenario A: - PASP: just above 1 million beneficiary households in 2022. - PSSB: up to 400,000 beneficiary households. - PASD: about 130,000 beneficiary households at full scale. - Timing and fiscal framework: - Scenario A aligned with IMF medium-term fiscal framework for 2012–17. - Scenario B implies substantially higher fiscal costs after 2017 to approach near-universal benefit coverage. ### Conclusions and Policy Recommendations - Rationale: - Expansion of social protection coverage is important to generate more inclusive growth, reduce risk of social tensions, and improve the economic environment. - Given labor market structure, expanding noncontributory social protection is more viable than relying only on contributory subsystems. - Such expansion is likely to substantially impact poverty reduction and, if combined with complementary interventions, drive sustainable changes in the productive structure of the labor force. - Fiscal sustainability: - Progressively building a social protection floor adapted to Mozambique’s needs does not present a threat to fiscal sustainability. - Mozambique has historically created fiscal space for priority spending and is expected to continue benefiting from revenue reforms and reprioritization of expenditures. - Government could make room for significant expansion of basic social security programs, possibly beyond the Operational Plan. - Operational capacity and investment needs: - Expansion is feasible only if accompanied by significant investment in systems for effective and efficient service delivery, especially given many vulnerable live in remote areas. - Largest reform challenge is establishing systems that allow service delivery in an efficient, transparent, and accountable way. - Essential system developments include: - A new management and information system, including a single registry. - New payment modalities (e.g., mobile banking). - New processes of identification and selection of beneficiaries. - Monitoring and evaluation mechanisms. - Effort to develop these systems is in progress with support from various partners. *Source: Toward a Mozambican Social Protection Floor (excerpt).* ### References ### _afr1404 - References ### References cited in the content unit - Cunha, N., L. Pellerano, J. Mueller, V. Lledo, Y. Xiao, and P. Gitton, 2013, “Towards a Mozambican Social Protection Floor: Consolidating a Comprehensive Social Protection System in Mozambique: Analysis of Policy Alternatives and Costs.” ESS Paper No. 41 (Geneva: International Labor Organization). - Instituto Nacional de Estatística (INE) (National Statistics Institute), 2008/09, “Household Budget Survey” (Inquérito ao Orcamento Familiar — IOF), Maputo. - International Monetary Fund (IMF), 2013, “Republic of Mozambique: Staff Report for Fifth Review under the Policy Support Instrument, and Request for Modification of Assessment Criteria,” IMF Country Report No. 13/1 (Washington). - World Bank, 2012, “Mozambique Social Protection Assessment: Review of Social Assistance Programs and Social Protection Expenditures,” Report No. 68239-MZ (Washington). ### Chapter: Fiscal Challenges of the Natural Resource Boom — Key points - Natural resource development will have major effects on the Mozambican economy and require substantial changes in fiscal policy formulation. - Resource revenues are currently modest but likely to become sizable; opportunity to close infrastructure gaps and invest in priority sectors such as health and education. - Risks include increased vulnerability to external shocks, reduced capacity to tax the nonresource sector, and governance weaknesses. - Aid flows averaged 9–10 percent of GDP over the last decade and may decline, creating an opportunity to reduce aid dependency. - Coal mining is expanding; recent natural gas discoveries could transform Mozambique into a major resource-rich country. - Potentially recoverable coal reserves of over 100 trillion cubic feet from recent discoveries by Anadarko and ENI are noted. - Over the next two decades Mozambique could become the third largest LNG exporter (after Qatar and Australia) and among the top five coal exporters within 10 years under ongoing investments. ### Mining sector indicators (from Table 10.1) - Mining GDP (nominal, MT million): - 2001–10 Average: 2,030 - 2011: 5,022 - 2012 (estimated): 8,718 - 2013 (projected): 12,270 - 2014 (projected): 14,978 - Mining GDP (share in total nominal GDP): - 2001–10 Average: 1.0 - 2011: 1.4 - 2012: 2.1 - 2013: 2.7 - 2014: 2.8 - Mining real growth: - 2001–10 Average: 19.8 - 2011: 15.5 - 2012: 39.3 - 2013: 33.4 - 2014: 15.6 - Mining contribution to total GDP growth (percentage points): - 2001–10 Average: 0.1 - 2011: 0.2 - 2012: 0.5 - 2013: 0.5 - 2014: 0.3 - Memorandum items: - Total real GDP growth: 8.0 (2001–10 Average), 7.3 (2011), 7.2 (2012), 7.1 (2013), 8.3 (2014) - Nonmining real GDP growth: 8.0 (2001–10 Average), 7.2 (2011), 6.8 (2012), 6.7 (2013), 8.2 (2014) ### Fiscal framework: instruments and primary objective - Primary fiscal objective: leverage natural resource revenues to boost development via large-scale investments in infrastructure and social sectors while ensuring savings to smooth revenue volatility and intergenerational equity. - Three important instruments: - Indicators: compute the nonresource primary balance (NRPB) and structural primary balance (resource revenues calculated using averages of past and/or expected future prices). - Rules: fiscal rules to delink expenditures from resource revenues and address exhaustibility and long-term sustainability. - Institutions: strengthen capacity for long-term revenue forecasts, medium-term budget orientation, quality public investment, and management of institutions such as natural resource funds. ### Fiscal framework objectives and decision matrix - Objectives depend on capital scarcity and resource horizon: - High capital scarcity, longlasting reserves: macroeconomic stability (example: Iraq). - High capital scarcity, short-term reserves: macroeconomic stability (example: Ghana) and sustainability/exhaustibility (example: Bolivia). - Low capital scarcity, longlasting reserves: macroeconomic stability (example: Saudi Arabia) and managing volatility (example: Canada); sustainability/exhaustibility (examples: The Netherlands, Kuwait, Norway). - Mozambique is identified as facing high capital scarcity and massive development needs; strategy should balance scaling up public investment with absorptive capacity and transparency considerations. - Resource wealth characterized as longlasting when revenues projected to remain at high levels (e.g., over 20 percent of total revenues) for more than 30–35 years. ### Natural Resource Scenario A: Assessing fiscal sustainability (shorter resource horizon) - Assumptions and timeline: - LNG production starts in 2019, increases gradually to full capacity by 2036, and starts to decline after 2043. - By 2055 (about 35 years after start of production), production levels would have significantly declined. - Revenue implications: - Resource revenues could reach 15 percent of nonresource GDP and represent up to 40 percent of total revenues by the end of the next decade. - Fiscal-rule approaches to set NRPB: - Bird-in-hand: save all resource revenues in a separate fund and spend only interest income (example: Norway’s rule of about 4 percent of stock value). - Permanent income hypothesis (PIH): set NRPB consistent with future financial wealth (example in text yields fiscal space of 2.8 percent of nonresource GDP). - Modified PIH: spend part up front given high domestic returns; requires future adjustment if domestic investments do not raise growth. - Fiscal Sustainability Framework (FSF): incorporate expected impact of higher investment on nonresource growth and revenues, allowing drawdown of government wealth while relying on higher growth to generate fiscal returns. - Preferred approach: - FSF identified as most appropriate for Mozambique but challenging to implement due to absorptive capacity, inflation and exchange rate impacts, need for public investment management improvements, and reinforced public financial management, transparency, and governance. ### Natural Resource Scenario B: Managing volatility (longlasting reserves) - Scenario characteristics: - Resource revenues could exceed 40–50 percent of total revenues and last for over 35 years. - Managing volatility becomes the main concern. - Three sources of revenue volatility: - Prices: Mozambique will be a price taker; natural gas prices often indexed to oil or set in spot markets. - Quantities: inherent production uncertainty and potential shorter-term supply contracts increase quantity volatility. - Institutional arrangements: risks in ensuring treasury receives all revenues, especially if state-owned entities market gas. - Macroeconomic consequences of volatility include slower nonresource growth, lower foreign direct investment, higher investor required returns, and procyclical spending that impairs quality and efficiency. - Price-based structural balance rules recommended to address volatility; compute structural primary balance using averages of past and futures prices to smooth fiscal outcomes. ### Application of price-based structural balance rules to Mozambique - Trigger consideration: significant exposure to revenue volatility once resource revenues reach at least 20 percent of total revenues; could occur as early as 2020 under optimistic LNG scenarios. - Three illustrative price-based rules: - Ghana rule: five-year rolling average of historical oil prices (5/0/0). - Trinidad and Tobago rule: rolling average of last five years, the current year, and futures prices for next five years (5/1/5). - Mongolia rule: 16-year moving average comprised of 12 years historical prices, a current year forecast, and three years of futures prices (12/1/3). - Buffer and target assumptions for simulation: - Structural primary balance target set at a positive 1 percent of nonresource GDP in the illustrative analysis to accumulate fiscal buffers; target may need to be higher in practice if resource revenues are large, volatility is substantial, and absorptive capacity is limited. - Simulation notes: - All three rules smooth prices; the Trinidad and Tobago rule (5/1/5) exposes Mozambique to the most volatility; the Mongolia rule (12/1/3) provides the greatest smoothing due to long historical series reliance. - Simulation assumptions include an oil price path with volatility similar to the last 10 years, natural gas prices held constant at 14 percent of oil prices, government fixed share of gross revenues at 42 percent, and nonresource revenues projected to remain constant. *Italic: Content derived from the PDF chapter "Fiscal Challenges of the Natural Resource Boom" in _afr1404 - References.* ### 22.2 percent of nonresource GDP, while the non-LNG sector grows at 13.5 percent in nominal terms. The ### Fiscal Challenges of the Natural Resource Boom ### Outcomes from Price-Based Rules - Price-rule options discussed: - Ghana price rule (5/0/0). - Trinidad and Tobago price rule (5/1/5). - Mongolia price rule (12/1/3). - Key simulation assumptions and parameters: - The average real rate of return on financial assets is assumed to be 8.5 percent. - A structural balance target considered in the analysis is 1 percent of nonresource GDP. - An expenditure growth limit scenario considers limits of 10–15 percent per year in real terms. - Main findings from simulations: - The overall primary balance deviates from the target of 1 percent of the nonresource GDP structural balance because of volatility in public finances. - The Mongolia price rule (12/1/3): - Does the best in terms of expenditure smoothing. - Generates a high level of financial savings (which may be too high given Mozambique’s substantial investment needs). - The Ghana price rule (5/0/0): - Provides an intermediate degree of smoothing. - Consistent with lower yet still sizable financial savings. - The Trinidad and Tobago price rule (5/1/5): - Combines past and future expected prices. - Generates higher volatility but lower financial savings than the Ghana rule. - Structural balance targets below 1 percent of nonresource GDP: - Could disrupt budget implementation and lead to an accumulation of debt. - Sensitivity to structural balance targets under the Ghana price rule (5/0/0): - Different structural primary balance targets do not substantially change overall primary balances. - Small differences in targets can have large consequences for accumulated financial savings. - Targeting zero percent of nonresource GDP structural balance would lead to periods of debt accumulation or disruption of budget implementation. - More conservative structural balance targets of 1 or 2 percent of nonresource GDP would ensure sufficient savings to protect against downturns and prevent abrupt cuts in spending. - Combining the 5/0/0 price rule with an expenditure growth limit of 10–15 percent per year in real terms: - Would permit Mozambique to accumulate significant savings (close to 300 percent of nonresource GDP) by 2050. ### Institutional Aspects and Policy Recommendations - Overarching goal: - Strengthen fiscal institutions so resource revenues support scaling-up of productive public spending without compromising fiscal stability. - Five priority areas for institutional improvements: - Tax administration: - Expand capacity to prepare resource revenue projections. - Put in place a training program at the Revenue Authority’s Large Taxpayer Unit to strengthen tax collection capacity, including audit capacity for large taxpayers in the resource sector. - Public investment management: - Reduce and harmonize the number of planning documents. - Provide sectoral ministries with clear “budget markers”—expenditure ceilings for public investment program proposals. - Substantially upgrade the centralized process to certify that investment projects offer value for money. - Prioritize projects based on well-defined economic and social criteria and develop greater capacity at the Ministry of Planning and Development. - Reject projects that do not meet minimum technical requirements or, if politically included, disclose to Parliament that the project was added despite not meeting minimum technical requirements. - Budget execution: - Improve cash flow programming and formulate a broader cash plan covering the entire financial year. - Address unpredictability for spending units and reduce substantial advance payments that can affect spending quality and increase cost-overrun risks. - Avoid excessive in-year adjustments of initial budget appropriations, especially across ministries. - Remedy these inefficiencies before the budget starts receiving substantial natural resource revenues. - Sovereign wealth/development fund: - Establish a sovereign wealth fund once resource revenues reach substantial levels after 2020. - Base inflows to and outflows from the fund on a preexisting fiscal rule determining what share of resource wealth should be saved and invested. - The fund should not have independent spending authority and could have two accounts: - A stabilization account connected to a single treasury account with flexible inflow/outflow rules to protect the budget from unexpected volatility. - A savings account to fund future spending needs; it should not be used to fund the annual budget except in well-established emergency situations. - Transparency: - Ensure regular information on production figures and exports and full government disclosure of all revenues received from the natural resource sector. - Public enterprises like ENH should report on financial transfers with other government entities, revenues collected on behalf of the government, and any quasi-fiscal activities performed (e.g., expenditures on subsidies, social services, infrastructure). - Align reporting with Extractive Industries Transparency Initiative standards. - Fiscal Responsibility Law recommendation: - Incorporate medium-term fiscal objectives and natural resource revenue management. - Scope to include: - Determination and presentation of the budget balance target. - Formulation, submission, and approval of a medium-term fiscal framework and annual budget targets. - Procedures for approving and making amendments to budget execution. - Details regarding calculation of resource revenues, rules for the establishment of a sovereign wealth fund, conditions for temporary suspension of the law, and correction mechanisms for deviations. ### Conclusions - Mozambique faces high capacity constraints; pace of using resource wealth should be gradual. - Scaling up public investment can be part of an optimal development strategy given capital scarcity, but must be accompanied by: - Strengthened capacity for macro-fiscal analysis. - Improved public investment selection and management. - Critical public financial management reforms to ensure efficient use of resource wealth. - Urgent expansion of government capacity to evaluate, select, and monitor public investment projects and concessions is required. - Gradual scaling up of investment as absorptive capacity eases will: - Improve investment efficiency. - Enable a quicker expansion of the capital stock. - Potentially raise and stabilize the rate of economic growth. - Help moderate exchange rate appreciation pressures or Dutch disease. *Source: IMF staff calculations.* ### chapter is based on Melina and Xiong (2013). ### Natural Resource Wealth and Public Investment Strategy: Implications for Growth and Debt ### Predicting Revenue: The Natural Gas Sector and Its Potential - Early discoveries: Pande and Temane increased proven gas reserves to 5½ trillion cubic feet (TCF); Mozambique started exports to South Africa in 2004. - Rovuma Basin discoveries: Total gas reserve discoveries in areas 1 and 4 combined reach 200 TCF and are expected to increase further. - Planned project scale: Anadarko and ENI plan to jointly develop an onshore LNG manufacturing site and build four LNG plants (“trains”) onshore. - Economic feasibility: Offshore location and proximity to South and East Asia make liquefaction and export commercially attractive given growing energy demand. - Planned LNG production from the four trains would process only a small fraction—20–24 TCF—of the proven Rovuma Basin reserves. ### The Model (Project Timing, Capacity, and Constraints) - Train capacity and construction timing: - Each train capacity: 5 million tons of LNG per year. - Construction of one train: approximately five years. - Building four trains simultaneously: not feasible due to scale and logistical constraints. - Construction of the first train expected to begin in 2014–15; first train expected to start production before 2020. - Second train construction starts one year after first; production one year after that. - Third and fourth trains could start two years after the second train. - Maximum capacity once all four trains operational: 20 million tons per year. - Baseline assumption: four-train LNG production scenario taken as the baseline for analysis given uncertainties (prices, investors/customers, financing, construction capacity). - Modeling tool: Fiscal Analysis of Resource Industries (FARI) Model (IMF FAD) used to project contributions to fiscal revenue, balance of payments, and national accounts; calibration carried out in 2012 and 2013 technical assistance missions. ### Liquefied Natural Gas Revenue Projections (FARI Results and Fiscal Dynamics) - Peak macroeconomic impacts: - LNG exports peak at 30 percent of non-oil GDP. - Sum of taxes and other fiscal revenue from natural gas, at its peak, reaches 9 percent of non-oil GDP. - Given current fiscal revenue at 20 percent of GDP, LNG revenue would contribute to a 50 percent increase in fiscal revenue in its peak years. - Revenue timing and composition: - Government’s share small in the first few years while production volumes are small and revenue covers costs. - Revenue surge expected in 2023 when all four LNG trains become operational, with gradual increase thereafter. - Initial main revenue source: subcontractor withholding tax. - Corporate income tax and payoff from public enterprise participation increase a few years after project start. - Exploration and production contract sharing revenue initially small; profit gas share increases with R-factor and eventually becomes the main source, accounting for more than half of total LNG-related fiscal revenue. ### Box 11.1 — Key Assumptions for the FARI Model (Project Inputs and Fiscal Regime) - Production timing and capacity: - LNG production projected to start in 2020. - Production in first year: 5 million tons (a quarter of full capacity because only one train operational). - Second train operational by end-2020, boosting production to 10 million tons in 2021 and 2022. - Maximum capacity of 20 million tons per year reached in 2023. - Investment and financing: - Total investment projected at $40 billion over the project horizon. - Investment split roughly half-half between upstream and midstream. - Upstream: $15 billion in upfront exploration and development by 2021; another $5 billion in drilling over the project horizon. - Midstream: $20 billion for LNG plants and supporting infrastructure between 2014 and 2022. - Financing: 30 percent in equity and 70 percent in debt; debt assumed on commercial terms. - Government participation: 10–15 percent share in the investment. - Organizational and project return assumptions: - Upstream and midstream under separate entities; upstream company pays service fees to midstream for liquefaction. - Internal rate of return for the midstream project assumed at 8 percent for determining liquefaction cost. - Price and long-run price behavior: - LNG prices follow oil price movements; oil price projections from IMF World Economic Outlook (IMF, 2013b). - Slope coefficient of 0.14 applied to convert medium-term oil prices (U.S. dollars per barrel) to natural gas prices (U.S. dollars/millions of BTUs). - LNG price assumed constant in real terms over the long run from 2018 onward. - Fiscal regime elements and representative parameters: - Fiscal regime comprised of: a production tax (royalty), a production-sharing agreement, and corporate income tax on contractors’ profits; EPCCs negotiated in 2006. - R-factor definition: ratio of concessionaire’s cumulative cash inflows, net of operating costs and tax, to cumulative capital expenditures; determines government’s share of profit gas. - Representative R-factor schedule and government profit-gas share: - R-Factor 1.0 → Share Profit petroleum/gas 10 - R-Factor 2.0 → Share 20 - R-Factor 3.0 → Share 30 - R-Factor 4.0 → Share 50 - R-Factor >4.0 → Share 60 - Cost recovery limit: 65 - Corporate income tax: 24 (in first 8 years from production start), 32 (after first 8 years) - Dividend withholding tax: 10 - Subcontractor withholding tax: 20 - Royalty: 2 *chapter is based on Melina and Xiong (2013).* ### Box 11.1 . (concluded ) ### Box 11.1 . (concluded ) ### Limits and Constraints to Public Investment - Mozambique has had relatively high public investment levels throughout its post-conflict history: public capital expenditure exceeded 10 percent of GDP in 16 of the past 20 years. - The bulk of investment expenditure was financed by foreign grants and debt, though domestic financing has increased in recent years. - Public investment focused on infrastructure: roads, ports, power plants and electricity, water and sanitation, schools, and hospitals. - Geographic and demographic constraint: population of about 25 million with 800,000 square kilometers of land. - Investment inefficiency issues: - Poor project selection (e.g., “bridges to nowhere”), higher-than-expected costs, bad governance, corruption, supply bottlenecks, lack of complementary infrastructure. - Absorptive capacity constraints: simultaneous start of many projects raises the likelihood of poor selection, mismanagement, or bottlenecks. - Empirical estimates and model assumptions: - Cross-country studies suggest average investment efficiency in low-income countries is around 50 percent. - For Mozambique, Domínguez-Torres and Briceño-Garmendia (2011) estimated as much as $204 million lost to inefficiency annually in the late 2000s compared to $664 million expenditure annually on infrastructure. - Assumed investment efficiency in normal times (“steady state”) is 60 percent for Mozambique. - When public investment positively deviates beyond 50 percent from its initial steady-state level, absorptive capacity constraints begin to bind. - Average investment efficiency would decline to around 30 percent if public investment spiked to around 200 percent from its initial steady state. ### Macroeconomic Effect of Investment Scaling-Up (DIGNAR Model) - Model features and scope: - The Debt, Investment, Growth, and Natural Resources (DIGNAR) Model captures public investment and growth nexus with debt sustainability and natural resource revenue management in a small-economy framework with limited asset-market participation. - Public investment builds public capital with inefficiencies and absorptive capacity constraints. - Purpose: analyze alternative public investment scaling-up plans and their implications for growth, debt, and fiscal outcomes given LNG revenue scenarios. ### The Natural Resource Sector (model specification and scenarios) - Model includes only the natural gas (LNG) sector; other natural resources excluded for simplicity. - Key uncertainties: price volatility, exhaustibility, and potential unfeasibility of extraction affecting government revenues. - Assumption specific to Mozambique: LNG sector is mostly offshore and does not depend on public infrastructure. - Two LNG scenarios analyzed: 1. Baseline scenario: - LNG production and revenue align with FARI model projections. - Production starts in 2020 and reaches a maximum level by 2023. - LNG revenue rises to a level of 30–40 percent of total fiscal revenues. 2. Adverse scenario: - Average LNG production is smaller (80 percent of the level in the baseline scenario). - Combined with negative LNG price shocks and earlier exhaustion of gas reserves. - LNG revenue peaks at only 20 percent of fiscal revenues. ### Public Investment Paths (three approaches) - Three investment-scaling approaches modeled: - Conservative approach: - No additional public investment until LNG production starts in 2020; then gradual increase up to 50 percent higher than 2012 in real terms. - Public debt does not rise as a share of GDP and declines over the longer term. - No fiscal adjustment needed; no reduction in private consumption. - Start of LNG production allows building strong fiscal buffers (government savings up to 60 percent of GDP in the baseline scenario). - Gradual approach: - Public investment is gradually increased in anticipation of LNG revenue and reaches the new level by production start. - Public debt rises gradually to a peak of 50 percent of GDP in 2019–20, then declines over the longer term. - Moderate initial fiscal pressure, later offset by natural resource revenue; fiscal savings from 2023 onward in baseline. - Private consumption lower in early years but catches up and eventually exceeds levels under the conservative approach. - Public capital stock and GDP by end-2030 are higher than under the conservative approach (about 10 percent and 5 percent, respectively). - Private investment is not crowded out; public capital increases productivity of private capital. - Aggressive approach: - Massive frontloading of public investment with substantial overshooting (up to eight percentage points of GDP). - Absorptive-capacity constraints limit additional public capital buildup relative to the gradual approach. - Short-term growth higher, but medium-to-long-term outcomes: much higher debt, required tax increases to service debt, pronounced fall in private consumption, and lower growth. - Pushes up domestic prices and leads to a more pronounced appreciation of the real exchange rate (a downward movement in the figures implies an appreciation), harming the traded sector and increasing Dutch disease risks. ### Fiscal outcomes under baseline and adverse LNG scenarios - Baseline scenario: - Gradual approach allows fiscal savings from 2023 onward; government savings can reach up to 60 percent of GDP. - Conservative approach postpones growth benefits by almost a decade. - Adverse scenario: - Minimal room to build significant fiscal buffers under all approaches. - Conservative approach: public debt would not rise. - Gradual approach: public debt would rise faster than in the baseline but would not require much fiscal adjustment. - Aggressive approach: public debt would rise explosively, requiring painful and sustained fiscal adjustment; private consumption would be permanently lower and never rebound. ### More Efficient Public Investment (structural reforms) - Simulated reforms: - Increase public investment efficiency from 60 percent to almost 70 percent over two decades. - Improve project selection by raising the annual net economic return on public investment at the initial steady state from 15 to 20 percent. - Combined effects: - Faster accumulation of public capital stock. - Additional non-LNG GDP growth of about 0.2–0.3 percent each year. - More conducive environment for private sector growth and improved debt sustainability. ### Conclusions and Policy Implications - FARI Model result: taxes and other fiscal revenue from natural gas could, at peak, reach 9 percent of non-oil GDP, or roughly one-third of total fiscal revenue. - Public investment scaling-up can help unlock Mozambique’s growth potential but excessive, debt-financed rapid scaling-up can lead to high debt ratios and efficiency constraints. - Comparative assessment of approaches: - Gradual scaling-up that anticipates some but not all future LNG revenue is appropriate given infrastructure needs and LNG uncertainty; it outperforms conservative and aggressive approaches in both baseline and adverse scenarios. - Conservative approach postpones growth benefits by almost a decade and is not desirable. - Aggressive approach is not desirable: similar public capital buildup as gradual approach but with much larger debt accumulation and unsustainability under adverse scenarios. - Two specific constraints highlighted: - Diminishing rates of return due to investment inefficiencies (poor planning, cost overruns, governance issues, bottlenecks, lack of complementary infrastructure). - Risks in realizing natural resource wealth (production volume and price uncertainties), exposing the country to downside risks if all future LNG revenue is anticipated. - Policy recommendations: - Strike the right balance between public investment and debt sustainability. - Establish an integrated investment plan to track and coordinate projects across sectors and ministries. - Monitor debt levels closely and conduct debt sustainability analysis at least annually. - Anticipate only a portion of projected LNG revenue in public investment plans; ensure debt-financed investment increases are moderate so the debt path remains sustainable under adverse scenarios. - Implement structural reforms to improve investment efficiency and returns: integrated investment program, strengthen project selection and coordination, capacity-building for project appraisal and evaluation, and improved governance and execution of public investment projects. *Source: IMF staff calculations and analysis in Box 11.1 (concluded).* ### References ### _afr1404 - References ### Dutch disease: mechanisms and growth implications - Definition: an increase in exploitation of a natural resource can crowd out economic activity in other export sectors through currency appreciation, making nonresource exports uncompetitive. - Classic model: three-sector economy (natural resource export sector, traditional export sector, nontraded goods sector) (Cordon and Neary, 1982). - Two transmission channels: - Resource movement effect: boom increases demand for labor, shifting production toward the booming sector and away from other export sectors; likely negligible for natural gas because operations generally employ relatively few people. - Spending effect: increased foreign exchange inflows converted into local currency and spent on nontraded goods raise the price of nontradables, appreciating the real exchange rate and reducing competitiveness of tradables. - Exchange rate regime pathways: - Fixed regime: conversion of foreign currency increases money supply, domestic prices rise—real exchange rate appreciation via higher domestic prices. - Flexible regime: increased supply of foreign currency causes nominal appreciation—real exchange rate appreciation via nominal exchange rate. - Broader theoretical context: Hecksher-Ohlin / Rybczinski effect; resource endowment increases can expand output in resource-intensive sectors and reduce output in other goods. - Growth implications: - Natural resource rents can finance public goods and investment. - Risks arise if gains come at expense of manufacturing and other nonresource tradables, which generate productivity growth, technological spillovers, increasing returns to scale, and employment. - Labor and capital shifts can cause transitional unemployment and impede development of manufacturing and human capital (learning by doing). - Dutch disease can raise export concentration and vulnerability to commodity price volatility; associated government revenue volatility can amplify real exchange rate volatility. - Empirical literature: mixed results—some studies find negative correlation between resources and growth; others find positive effects. Effects depend on governance conditions and whether resources are “point-source” (oil, gas, minerals). Short-term positive impact may be followed by long-term negative impact in weak governance contexts (Collier and Goderis, 2009; Murshed, 2004; Isham and others, 2005). Point-source resource development has sometimes been associated with institutional deterioration (Auty, 2000). ### Evidence of Dutch disease in Mozambique (findings and indicators) - Stage of resource development: - Natural gas: exports of liquefied natural gas not expected to materialize until 2018–20; significant exploration and preparatory activity underway. - Coal: exports began in 2011; coal exports accounted for some 12 percent of total exports in 2012; peak exports delayed by local transport bottlenecks. - Foreign direct investment (FDI) inflows from gas-related exploration and preparation largely offset on the balance of payments by imports of goods and services. - Historical megaproject example: - Mozal aluminum smelter: began in 1998 and officially opened in 2000; appears not to have had significant effects on the real exchange rate because it used few local inputs and earnings largely covered production-input imports and debt service. - Real effective exchange rate (REER): - REER has been relatively stable since 1995. - Fluctuations 2009–12 largely explained by the central bank’s significant easing of monetary policy in 2009–10 and subsequent tightening in 2011–12. - IMF calculations indicate the exchange rate is broadly in line with fundamentals (IMF, 2013). - Prices and competitiveness: - Since 2011, price of nontradables grew about 13 percent, price of tradables grew about 11 percent; the resulting loss of competitiveness by this measure is marginal. - Tradable/nontradable indices and REER series are derived from official three-digit price data categorized by IMF staff into tradable or nontradable, with final indicators as weighted averages. - Export performance: - Traditional exports grew by almost 19 percent per year on average between 2006 and 2012, led by sugar, tobacco, and lumber. - Traditional exports grew on average by 40 percent per year starting in 2010, reflecting the coming on stream of large new agro-industrial plantations. - Conclusion: little strong evidence of Dutch disease to date, but pressures could mount as resource revenues increase in magnitude; policymakers should prepare strategies to support nonresource competitiveness. ### Policy approaches to ameliorate Dutch disease effects - Two complementary policy objectives: - Smooth the pace of consumption of natural resource receipts to avoid spikes in the real exchange rate. - Boost competitiveness and growth in nonresource export sectors. - Sovereign wealth funds (SWFs) and stabilization mechanisms: - Purpose: save part of current resource receipts to slow real exchange rate appreciation, reduce spending effect, stabilize government revenues, and maximize intergenerational benefits. - Effectiveness depends on integration with the budget process, transparency of rules and operations, accountability mechanisms, and asset-management strategy. - Country examples: - Norway: - Oil fund manages accumulated budgetary surpluses; no specific deposit/withdrawal rules; budget transfers net oil revenues and fund finances the non-oil deficit. - Assets under ministry of finance control and managed by the central bank. - Oil revenues account for less than 15 percent of government revenues. - Norway’s institutional strength supports its flexible approach, which may not transfer directly to developing countries. - Chile: - Copper stabilization fund uses accumulation and withdrawal rules based on a reference copper price determined annually, roughly a 10-year moving average. - Deposit rules: when the price of copper exceeds the reference price by between $.04 and $.06 a pound, 50 percent of the state copper company’s revenue is deposited; if above this range, 100 percent deposited. - Withdrawals governed by symmetric rules; withdrawals often used to subsidize domestic gasoline prices. - Botswana: - Pula Fund objectives: ensure national savings contribute to sustainable development; assets remain part of the central bank balance sheet and can be used for balance of payments purposes. - Fund composed of Government Investment Account (savings from fiscal surpluses and inflows of government debt) and broader national savings in excess of central bank target for liquid reserves. - Central bank target: six months of import cover; transfers into/out of account when import level deviates from target by three months of cover in either direction. - Nigeria: - Excess Crude Account (ECA) established in 2004; initially accumulated significant balances and helped during 2008–09 price drop. - ECA suffered from weak legal grounding and ad hoc withdrawals, leading to near depletion by 2011. - In 2012 a new sovereign wealth fund with three components (stabilization fund, infrastructure fund, intergenerational saving fund) was created; it has stricter rules but was still not fully operational and saw large withdrawals in 2013. - Managing savings and fiscal rules: - Increase national saving to reduce capital inflows; use fiscal rules to manage extractive-industry revenues and macroeconomic effects. - Chile example: fiscal policy structured around a “structural balance rule,” initially aimed at generating a structural surplus of 1 percent of GDP per year (later changed to balance). ### Key numeric indicators and time markers (preserved exactly) - Natural gas exports could account for 15 percent of GDP and 50 percent of total exports (IMF, 2013). - Coal exports accounted for some 12 percent of total exports in 2012. - Liquefied natural gas exports not expected to materialize until 2018–20. - Mozal began in 1998 and was officially opened in 2000. - Nontradables price growth since 2011: about 13 percent. - Tradables price growth since 2011: about 11 percent. - Traditional exports growth: - Almost 19 percent per year on average between 2006 and 2012. - Grew on average by 40 percent per year starting in 2010. - Norway: oil revenues account for less than 15 percent of government revenues. - Chile copper fund rules: when price exceeds reference by between $.04 and $.06 a pound, 50 percent of state copper company’s revenue deposited; if above this range, 100 percent deposited. - Botswana central bank reserve target: six months of import cover; transfer trigger: deviation by three months of cover. - Nigeria: ECA established in 2004; near depletion by 2011; new fund created in 2012; large withdrawals in 2013. - Chile fiscal rule initial objective: structural surplus of 1 percent of GDP per year. *Italic: Content extracted from _afr1404 - References (IMF PDF) provided as the source content.* ### 2009. The goal is to isolate revenues from cyclical factors. Structural ### _afr1404 - 2009. The goal is to isolate revenues from cyclical factors. Structural ### Structural revenue rules and independent panels - Structural revenue is determined by two independent panels of experts and reflects what revenue would have been if the economy had operated at potential rather than actual output, and what copper revenue would have been at a medium-term reference world copper price rather than the actual price. - Under these rules the government can run a deficit larger than the target if output falls short of potential, if there is a recession, or if the price of copper is below its medium-term equilibrium. - One of the keys to the Chilean success is the independence of the expert panels. The extent to which the panel membership and decisions are immune from political influences will determine the effectiveness of such an arrangement (IMF, 2009, 2013). ### Resource revenue management: Botswana - Botswana’s mineral wealth management, since 1994, has been based on a rule that allocates nonrenewable resource revenue to investment expenditures or savings in the Pula Fund to transfer mineral wealth to future generations. - The “sustainable budget index” principle seeks to ensure that current spending is financed only with nonresource revenues. - There is a medium-term fiscal objective for the cumulative budget balance over a five-year period, which coincides with Botswana’s National Development Plan, and a cap on expenditure in terms of GDP. - Success factors cited: strong governance, quality regulation, anticorruption policies, transparency, accountability, and training of public officials in project analysis. ### Resource revenue management: Ghana - Ghana implemented the Petroleum Revenue Management Act in 2010 ahead of the first full year of its oil production. - The act created: - a stabilization fund, - an endowment fund for future generations, and - an annual budget fund to earmark funding for public investment. - The act sets targets for the distribution of resource revenue between the budget and two wealth funds—up to a maximum of 70 percent to the budget (of which 70 percent must be used on investment projects) and the remainder to the wealth funds. - It is too early to assess how well this approach has worked in Ghana; limiting discretion with a fiscal target (such as a nonresource primary balance target or a price-based rule) is identified as best practice, which Ghana’s 2010 act does not do (Lundgren, Thomas, and York, 2013). ### Increasing competitiveness in nonresource-based sectors - Recommendation: governments should invest in public goods such as education and infrastructure and improve the business environment for nonresource-based economic activities. - The use of public investment to bolster growth in nonresource sectors is often unsuccessful; sustaining capital stock built up during windfall revenue periods is a challenge. - Short-run revenue volatility raises concerns about macroeconomic instability; evidence suggests combining public investment with a resource fund can help address macroeconomic problems (Berg and others, 2012). ### Public investment quality, risks, and country examples - Botswana: effective approach to investment in public goods through national development plans and avoiding projects without provision for long-term recurrent costs (Sarraf and Jiwanji, 2001). - Chile: successful investment in human resources; example statistics: - mid-1960s: over 80 percent of men and 70 percent of women in Santiago had less than a high school education. - by the mid-1990s: those figures had been reduced to 48 percent and 29 percent, respectively. - A key element of Chile’s success was institutionalizing well-designed and operational information systems for decision-making on public investment projects and fiscal capital budgeting, enabled by a large number of public officials trained in project analysis (Fontaine, 1997). - Risks: windfall revenues can make government investment policy vulnerable to interest groups, producing unproductive, rent-seeking behavior, subsidies and transfers that grow faster than windfall income (Lane and Tornell, 1996). - Nigeria example: oil revenues argued to have contributed to deterioration in the quality of public institutions and to waste and corruption in public projects during 1970–2000 (Sala-i-Martin and Subramanian, 2003). - Cross-country evidence: presence of resource rents tends to reduce public capital stock (Bhattacharyya and Collier, 2011); resource-abundant developing countries tend to invest less in education (Birdsall, Pinchkney, and Sabot, 2000). ### Conclusions and policy recommendations for Mozambique - Many lower-income countries have struggled to manage resource windfalls effectively, partly because of weak institutions and partly because point-source natural resource wealth can weaken institutions and normalize rent-seeking. - Suggested actions: - Establish fiscal rules governing the use of resource revenues as soon as possible; some rents have already accrued in the form of windfall profits tax payments, so rules should be functional before the bulk of revenues are generated. - Set the stage for a sovereign wealth fund with clear rules and adequate oversight; allow some revenues to finance investment in human and physical capital while clearly specifying rules for deposits and withdrawals. - Ensure transparency of fiscal operations related to resource revenues and the sovereign wealth fund, including regular and timely public auditing to hold fund managers and policymakers accountable. - Establish a well-designed public investment strategy consistent with the national development plan to ensure resource revenues finance investments that lead to higher and broader-based economic growth rather than wasteful current expenditures. - Strengthen institutional and human capacity to assess investment projects so that the public investment strategy can be developed and implemented effectively. *Source: MOZAMBIQUE RISING (excerpt).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2014/_afr1404.pdf_