WASHINGTON - The World Bank’s Mozambique Economic Update (MEU) series is designed to present timely and concise assessments of recent economic trends considering the country’s broader development challenges.
Executive Summary
The first part of this Economic Update assesses Mozambique’s economic recovery from the COVID-19 crisis, and its outlook. The thematic section (Part II) discusses the potential offered by agriculture to promote a sustainable and more inclusive recovery, and outlines reform options for realigning agricultural support policies and programs towards competitiveness, climate resilience and food security objectives.Mozambique’s recovery is underway – can it be sustained?Despite considerable challenges, the economy is experiencing a timid recovery from the COVID-19 crisis, which hit the services and extractive sectors hard.
Several constraints dampened the recovery at the beginning of 2021, with the economy growing at a meager 0.1 percent, the lowest in the last four years. As the year progressed, the slowdown in COVID-19 cases allowed some easing of social distancing measures globally and domestically, leading to a pickup in aggregate demand. GDP growth is estimated to have reached 2.2 percent in 2021, compared to a contraction of 1 percent in 2020.
A rebound in the agriculture and service sectors has helped underpin the incipient recovery, offsetting a contraction in extractives and manufacturing output. Agricultural growth was supported by favourable climatic conditions and the impact of investments in improved seeds, machinery, and irrigation. The gradual lifting of containment measures boosted private consumption, improving the service sector’s performance.
Despite the gradual uptick in domestic and global demand, growth in the extractives and manufacturing sectors remained subdued, with the suspension of major LNG projects playing a dominant role. A marked production decline in extractives and manufacturing in the first quarter of 2021 overshadowed the solid growth posted in the second half of the year. Business indicators
fluctuated significantly throughout 2021, due to the recurring waves of the pandemic, showing, on balance, only marginal improvements.Although the pandemic and other shocks posed significant fiscal pressures, revenue collection has held up, and total expenditures have been contained. The overall fiscal deficit is estimated to have declined from 5.7 percent of GDP in 2020 to 4.5 percent in 2021. Fiscal consolidation is expected to resume in the medium term, but the public sector wage bill continues to increase, reaching 13.8 percent of GDP in 2021, driven by rises in compensation beyond the basic salary.
However, the authorities have started taking important steps to improve spending efficiency, including through establishing a new regulatory framework to manage the wage bill.Public debt has continued to rise as the authorities resorted to the expensive domestic market to fufil financing needs. The domestic debt stock reached 22 percent of GDP in 2021, up from 16 percent in 2019.
Apart from COVID-19, higher spending to address the security and humanitarian situation in northern Mozambique and short-term financing for underperforming SOEs have elevated domestic debt levels.Growth is expected to accelerate in the medium term, averaging 5.7 percent between 2022 and 2024, mainly reflecting the start of LNG production at the ongoing offshore Coral project in 2022 and expected resumption of investments in the largest (Total-led) LNG project.
The escalation of insurgency in northern Mozambique in early 2021 led to the postponement of LNG projects, but they have not been canceled. Agriculture should maintain a positive performance in the upcoming years supported by continued investments in inputs.
Recovery in global demand and commodity prices will continue to support export growth, and FDI inflows (mainly linked to LNG) will sustain investments.
However, downside risks are substantial and could lower growth to 1.9 percent in 2022 (from a projected 3.8 percent). These include rising import prices owing to the Ukraine conflict, further COVID-19 infection waves, and insurgency in the north. While a prolonged war in Ukraine would weigh on economic recovery, Mozambique will benefit from the broad-based rise in commodity prices.
The Ukraine war will likely impact Mozambique through direct and indirect channels, although the country has weak (direct) trade linkages with Russia and Ukraine. The rise in international oil and cereal prices may undermine economic activity and strain the external balance in 2022. Oil and wheat represent 12 and 3 percent of Mozambique’s total imports, respectively.
The authorities have partially passed on the rise in international oil prices to consumers, exacerbating pre-existing inflationary pressures. To tame inflation and stabilize the currency, the Central Bank raised interest rates on March 31, 2022.
The Bank of Mozambique was the first central bank globally to increase interest rates in January 2021. A rise in coal and gas prices, combined with higher coal production and the start of LNG production at the Coral offshore project in 2022, will largely offset the increased trade deficit owing to rising import prices.
With the right support, agriculture can be a source of growth, poverty reduction and food security
Part II of this Economic Update discusses reform options that could help Mozambique maximize its agricultural potential. Agriculture remains the main economic activity. The sector has vast growth potential given its agroecological diversity.
Mozambique’s strategic geographical position allows it to play an entrepot role for agricultural trade with the neighboring landlocked countries. Agricultural growth is critical to ensure food security as approximately 70 percent of the country’s population is engaged in the sector. Despite its potential, agricultural productivity remains low by regional standards, with Mozambique having one of the lowest cereal yields per hectare.
This is largely due to low input access and intensity, weak technology adoption, limited provision of agricultural services, high seasonality in production and climate vulnerability. Given Mozambique’s dependence on climate-sensitive agriculture, increased frequency and intensity of storms, droughts, and floods put further pressure on agricultural income and food security.
Available evidence shows that agricultural growth would decrease poverty and inequality over three times faster than growth in any of the other sectors. Thus, how the sector is supported is key, and must be aligned with the broader goals of sustained growth and poverty reduction.
Over the last two decades, Mozambique has seen low and declining public spending on agriculture, falling to only 4 percent of the national budget—less than half of the New Partnership for Africa’s Development (NEPAD) target of 10 percent. As much as 95 percent of total support to the sector involves producer support, largely in the form of market price support (MPS) through trade protection measures.
This mainly benefits a small number of commercial producers, while putting up food prices for the majority of agricultural households, and the urban poor. Targeted and productivity-enhancing agricultural support is associated with improved agricultural trade balance and growth performance.
This means increasing support to activities providing general benefits or public goods—such as agricultural innovation (R&D and human capital), animal/plant health services, marketing, and rural infrastructure. However, in Mozambique, this type of agricultural support represented only 0.6 percent of agricultural GDP in 2018—the lowest of all countries analyzed.
For the full report, visit: https://documents1.worldbank.org/curated/en/099524206212215648/pdf/IDU093b925ec0187c043db0b41c055df875bbba9.pdf?cid=ECR_E_NewsletterWeekly_EN_EXT&deliveryName=DM148583
