Chapter

11 Mozambique: Economic Rehabilitation and the Poor

Editor(s):
Ke-young Chu, and Sanjeev Gupta
Published Date:
April 1998
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Author(s)
Paulo S. Lopes and Emilio Sacerdoti 

By any income standard or measure of living conditions, Mozambique is one of the poorest countries in the world. Despite its rich natural resources, inadequate production planning and acute social conflicts that had come to the open in the mid-1970s led the country into an alarming situation where the survival of the majority of the population depended on foreign aid. Starting in 1987, economic reforms were launched that have contributed to arresting the contractionary trends that had hindered the economy since the early 1980s.

This paper seeks to provide an overview of the impact on the poor of the policy measures included in the 1986–90 economic recovery program. The analysis, which focuses on the changes in relative prices and wages, indicates that between 1987 and 1990, minimum- and low-wage earners improved their purchasing power, notwithstanding large increases in official prices and an initial period in 1987 during which real wages eroded. In areas with adequate security, food production increased substantially, improving the situation of small farmers. Those parts of the population displaced or severely affected by the civil war had to continue to rely on emergency food aid, despite the increase in agricultural production. Poverty remains widespread among urban and rural households, and overall food security is inadequate. To improve food security for urban households, an income supplement scheme was introduced in 1990.

Characteristics of the Poor

Defining a poverty benchmark for Mozambique is difficult. The great majority of the population have very low living and consumption standards. Even nutrition criteria fail to provide an adequate reference because hunger and malnutrition are widespread and recurrent. In these circumstances, the focus turns to the poorest segments of the population. According to Green, at least 60 percent of the population met the criterion of absolute poverty,1 and the few social indicators available confirm the degree of misery that such high rates of poverty would imply.

In Mozambique’s context of generalized food scarcity, access to additional food sources may be crucial. Even when food ration allotments were fully available, these accounted for not more than 60 percent of standard caloric needs. Although having access to a productive machamba (small farm plot) helped households escape serious malnutrition, the rural areas were not better off than the urban areas particularly because the lack of inputs was aggravated by the lack of security, which made even subsistence farming extremely difficult. In addition, the distribution of aid and other imported food staples remained irregular in the countryside. As a result, the incidence of absolute poverty was, according to Green’s estimates, 68 percent in the rural areas (including displaced farmers), compared with between 32 percent and 52 percent in the urban areas. If, therefore, the “poorest of the poor” are to be designated, they might well be the displaced or war-affected rural dwellers who were more often victims of starvation and of war-related injuries than the urban poor.

Composition of Household Income and Expenditure

There is little diversity of income sources in Mozambique: 85 percent of the workforce is employed in the traditional agricultural sector, with few employment opportunities existing elsewhere. As much as 90 percent of the cultivated area is exploited by the family sector. Crop diversity is limited, given farm size, seed availability, and technical know-how, making producers very dependent on the prices of a few crops. In addition, the lack of security has rendered farming extremely risky, and many peasants have been forced to abandon their lands.

The remaining 15 percent of Mozambique’s employed labor force is distributed evenly between the industry and services sectors, where, on average, standards of living are slightly higher and absolute poverty is less prevalent. Income from informal sector activities often complements official income, but the earnings potential is limited (typically up to 30 percent of the minimum wage).

The external sector has played an important role in mitigating poverty, as remittances from emigrant workers (mainly from miners in South Africa) in foreign currency and in merchandise are important sources of revenue for some families. During 1988–90, remittances from abroad recorded in the balance of payments averaged about $71 million a year, or about 66 percent of commodity exports. Unrecorded remittances were probably also very significant.

The regional incidence of poverty has different implications in terms of household revenue and expenditure patterns. In urban areas, wage earners dwell along with small merchants, providers of services, and unqualified laborers who operate for the most part in the informal sector. In rural areas, farmers’ and traders’ earnings and levels of self-provisioning (for own consumption) depend to a great extent on crop volumes and prices. Even the wage-earning agricultural workers employed in private and state farms and in cooperatives manage to produce for their own household consumption or for market exchange. However, in the determination of income and expenditure profiles for the absolute poor, only the two extreme rural (self-provisioning) and urban (salaried) cases will be considered. As will be shown later, each group has been affected differently by the economic rehabilitation program.

The distribution of income sources for self-employed rural households in 1980 was, according to some hypotheses formulated by Green, as follows: self-provisioning, 70–75 percent; agricultural sales, 10–15 percent; remittances, 10 percent; other, 5 percent. In the context of the economic deterioration that occurred during 1982–86, relief aid replaced a considerable part of self-provisioning. In addition, the totals for agricultural sales and for remittances declined, although they might still have accounted for an equal or greater share of rural household income (which in 1988 in real terms was 25–35 percent below the 1980 level). Income from informal sector activities may also have increased its share at the time.

Sources of income for urban wage earner households living in absolute poverty are not easily identifiable. Green estimated that if two members of a household (typically eight people) had minimum-wage jobs, then such a household would be above the absolute poverty level. If only one minimum or low wage was earned (which is not the case in 90 percent of the absolutely poor households), it would account for not more than 50–70 percent of an absolute poverty cutoff household income of Mt 32,000 per month ($62). Under these circumstances, income from informal sector activities and direct access to farm products from small family farm plots become very important. Estimates for the implicit income equivalent of that access or for informal sector income are not available.

The Economic Rehabilitation Program and Its Consequences

The period 1982–86 was characterized by economic collapse (minus 7 percent real growth a year), which was due in great part to the intensification of armed insurgency and to natural causes (droughts and floods), and also to a policy of centralization, which aggravated structural economic imbalances. Growth resumed (4–5 percent a year) following the launching of the Economic Rehabilitation Program (ERP) in 1987, supported by the IMF’s structural adjustment loans and World Bank’s rehabilitation loans.

The principal objectives of the ERP were (1) to restore a minimum level of income and consumption, particularly in the rural areas; (2) to curtail domestic financial imbalances and strengthen the external payments position; and (3) to establish the conditions for sustainable economic growth once security conditions permitted. The growth target for the period 1987–89 was set at 4 percent on average. Central to the program were major adjustments to the exchange rate, together with a full pass-through to domestic prices, price liberalization, and strengthening of the government budget by limiting current expenditure to a level below that of revenue growth. Price subsidies were to be reduced through increases in the consumer prices of the staple commodities, which were subject to a rationing system.

Following the stepwise devaluations in 1987 and 1988, fixed prices were increased sharply, including prices of subsidized commodities. In 1986, the latter included maize, maize flour, rice, sugar, edible oils, and soap. By the end of 1989, limited subsidies were maintained only for maize, as the prices of the other commodities were brought to the import parity level or, for domestically produced commodities, to the domestic cost level.

Concurrently, the cost of these subsidies to the budget increased from Mt 500 million in 1986 (1 percent of current expenditure) to Mt 5.1 billion in 1987 (1.2 percent of GDP) in light of the very large depreciation of the exchange rate, but declined to Mt 3.5 billion in 1988 and 1989 (1.5 percent of current expenditure and 0.4 percent of GDP). Other fiscal measures of the program included a comprehensive tax reform, which widened the coverage of the turnover tax and increased the consumption tax rate; streamlined personal income taxation; and accelerated corporate tax payments. School and hospital fees were also increased. In addition, in 1987 the civil service staff was reduced by 10 percent.

Consequences of Policy Measures

The rehabilitation program affected poverty through the official price increases, which in 1987 exceeded the rise in the minimum wage; the reduction in the size of the civil service; and the increase in indirect taxes and user fees. Each of these aspects will be addressed in turn.

Pricing Measures

In early 1987 official prices almost tripled, while prices in the parallel market remained broadly stable. During the following years, official prices were again adjusted several times.

The consumer price index, constructed on the basis of giving a 75 percent weight to official prices, and 25 percent to parallel market prices, rose by 163 percent in 1987, 50 percent in 1988, 42 percent in 1989, and 49 percent in 1990. A selected commodity index derived exclusively from the staples in the ration allotment basket rose almost 16-fold during 1986–89, and had a considerably different time pattern from the CPI, as the prices of rationed goods were increased much more sharply in 1988 than in 1987. The price of fuelwood, the single most important nonfood item in the budgets of poor households, and prices in parallel markets increased relatively little under the ERP. The relative stability of parallel market prices up to 1989 indicates that those prices already reflected the much-depreciated parallel market exchange rate and that scarcity premiums did not increase.

On the earnings side, minimum wages were raised by an amount designed to protect the purchasing power of a worker in a typical household. On the basis of the official CPI, real wages appear to have declined by as much as 15 percent during 1987. However, average real income levels for wage earners also appear to have been restored in the two subsequent years, while the supply of consumer goods increased. The urban population with no official wage income and only informal sector income might have been more seriously affected than wage earners.

Indices deflated with the quarterly CPI (which use December 1986 as a base) show that real wages had declined sharply by about 50 percent by June 1987, but that a recovery started in September 1987 with a 50 percent rise in nominal wages. With two additional increases in nominal wages in March and October 1988, by the end of 1988 real wages based on the CPI had returned to the level at the end of 1986 and by 1989 exceeded it somewhat. In 1990, as the CPI increase (49 percent on an end-of-period basis) exceeded the wage increases of 16–23 percent, real wages declined even after correcting for the exceptional thirteenth monthly wage paid to civil servants and many other employees in December.

The expenditure-weighted index provides a less favorable picture, in that real wages in 1989 were only 12–13 percent above average 1986 levels for agricultural workers and for technicians and administrative personnel. The relative income position of nonagricultural workers seems to have been the most affected, since the growth in their nominal wages was less than that of the other categories and, in 1989, their real wage was still 9 percent below the 1986 level. According to the expenditure index, the decline in real wages did not take place until 1988. This was due to the sharp increase in the prices of the basic food staples that constituted the bulk of the ration allotment basket.

The depreciation of the metical had an ambiguous impact on family income from remittances. In 1987, the parallel market foreign exchange premium fell from Mt 1,600 to Mt 1,200 per $1, which may have completely offset the gains from the higher official rate.2 However, on the plus side, there was a rise in recorded remittances following 1987 that may have been related to the depreciation. Moreover, if the remittances were being used all along to buy products priced in foreign currencies (in special stores or in the black market), it is probable that the parallel market appreciation of the metical did not greatly affect households receiving remittances. In 1988 and 1989, the parallel market exchange rate again depreciated significantly, augmenting the purchasing power of remittances.

Rural producers probably fared better than the urban households. Family sector commercialized crop production expanded considerably in 1987–90, and producer prices were increased in 1987 by an amount larger than the increase in the CPI.

To estimate the real income of agricultural producers, a basic producer price index was developed from a list of 13 commodities, and a weighted average of the individual commodity producer prices was also computed, with weights determined according to the relative market value of the commercialized family sector production of each commodity during 1986. For 1986–89, the basic producer price index showed that prices rose more than 11-fold, compared with an 8-fold increase in the CPI. Since market production expanded, it would appear that the agricultural producers who were marketing a part of their production gained. An important element of overall welfare is also the availability of consumer goods in the countryside, which appears to have improved in 1988 and 1989. A general increase in commercialized farm output after 1987 indicates that producers responded positively to the newly introduced market incentives.

Fiscal Policy Measures

The increases in indirect taxes and consumption taxes under the ERP had a very modest price impact in comparison with the administered changes in official prices, and thus can probably be neglected. User fees for hospital consultations and for school enrollment were raised significantly in 1987 and 1988. School fees and charges were estimated to amount to 5 percent of the minimum wage.3

In 1987, to reduce the fiscal imbalance, 21,000 civil servants were laid off—approximately 10 percent of the total. The subsequent increase in urban unemployment was exacerbated by the repatriation of mine workers from South Africa (up to 350,000) and by the influx of displaced persons from the areas most affected by the lack of security. Some of these laid-off workers must have been absorbed through the expansion in economic activity and the resumption of economic growth following the implementation of the ERP. In 1988, the government conducted a rapid status survey of households in two major urban areas, Maputo and Tete, and subsequently took steps to complement the existing food rationing system by allocating land for cultivation and basic inputs in strategic, safe areas, as well as by expanding pilot programs that provide meals in primary schools and factories.

The basic social programs on health and education continued to be expanded, mainly through foreign aid. Continued war-related damages limited the impact of this effort. Existing social programs were maintained to benefit orphans, old-age pensioners, and disabled persons, as were feeding programs for primary school children. Income supplementation schemes were introduced in 1990, which became fully effective in 1991, with the aim of limiting urban poverty, and covered large urban families with no more than one minimum wage.

Food Security and Urban Rationing System

The food security situation differed in rural and urban areas. In rural areas, as a result of the war and of recurrent droughts, more than 4 million people had been displaced or severely affected by the mid-1980s. Under these circumstances the government had to turn to international assistance to avert widespread starvation. The first international appeal for emergency assistance to Mozambique was launched in April 1987. The food aid received was used to help meet the population’s nutritional needs—in rural areas free distribution to the more seriously destitute, displaced, and severely affected families and for urban dwellers and rural wage earners through subsidization of basic food staples.

In the following years, the emergency appeal widened its focus to cover inputs needed for rehabilitation in the areas of agriculture, water supply, health, and education. In 1990, the scope of the ERP was expanded to encompass all structural rehabilitation activities within a strategy for reconstruction and poverty alleviation. The emergency appeal concentrated on meeting basic human needs, especially in rural areas. The emergency programs focused particularly on the provision of food and other essential inputs to the populations displaced or severely affected by the war. Regrettably, the lack of security, poor accessibility of some areas, and logistic difficulties also constrained the emergency programs. Such logistic constraints exacerbated a situation already hampered by the insufficiency of food aid pledged relative to estimated requirements. As a result, in many areas, food rations often could not be distributed or were well below the levels required.

Relief aid was distributed at the local level by a special government relief department, while the actual distribution to households was handled by community leaders. Because of the deteriorating security situation, the number of households and communities requiring emergency assistance increased substantially in the period 1984–89, and relief operations had to be expanded. Food distributed amounted to 180,000 tons in 1988, compared with 57,000 tons in 1985; distribution in 1989 was estimated at about 170,000 tons.

In the two main cities of Maputo and Beira, food aid was marketed to a significant extent through the urban rationing system (Novo Sistema de Abastecimento, NSA), This system was designed initially to provide registered households the means to purchase at subsidized prices a fixed ration of food staples and some other necessities, which would cover approximately 60 percent of the daily caloric requirement. However, the amount of food staples commercialized in urban parallel markets increased. In addition, many urban residents managed to obtain food directly from farms in the suburban countryside. In Maputo, food is also imported from neighboring Swaziland. Overall, it is estimated that the food security situation in urban areas is substantially better than in the countryside. In line with the objectives of the ERP, by 1990, only the subsidy on yellow maize remained, while the prices of the other products were raised to levels equivalent to import parity.

Public Expenditures and the Poor, 1990–92

Within the framework of the 1990–92 economic and social rehabilitation program, the government decided to strengthen the poverty reduction effort through better focusing of major public expenditure programs and improvement of the safety nets to protect vulnerable households. In addition, measures were implemented to generate employment opportunities for the poor, including revision of the investment program to promote labor-intensive projects, projects with basic training components, small enterprises in the private sector, and informal sector activities.

To alleviate poverty and stimulate growth, three priority areas of expenditure were identified: the promotion of smallholder agricultural production; the improvement of health and education services; and the strengthening of basic infrastructure.

Measures to assist small family farms recognized that the key to reducing poverty in the rural sector was to increase agricultural production through adequate assistance to small farmers. To that effect, in 1990 the authorities formulated the Priority District Programs, which aim at revitalizing production and improving living standards in the regions with relatively more favorable security conditions through the provision of extension services, adequate food, and inputs, along with improved road and water supplies.

The provision of education and health services was severely hampered by the war, which resulted in the destruction of local schools and a large part of the rural health network. Moreover, the economic crisis led to a reduction in health expenditure as a share of the government’s recurrent budget. In the health care area, the government planned to rebuild or rehabilitate health infrastructure and strengthen prevention services throughout the country. In education, due to the effects of the war, very limited educational services were provided outside the major cities and provincial capitals, and schools in the main cities were over-crowded. Against this background, the 1990–92 investment program assigned priority to the provision of education in rural areas, together with improvement in the quality of teaching.

For the rural poor affected by the war, the emergency program was the main vehicle of assistance. To the extent that the improved security situation permitted refugees to return to their homes and farms, additional support was needed for returnees to start economic activities in the agricultural sector.

The safety net for poor households was expanded through a food security subsidy introduced in Maputo and other provincial capitals. Eligibility was limited to (1) households with not more than one salary earner and with over five members; (2) households with no salary or other substantial source of income; and (3) persons over 50 living alone and with no significant source of income. To limit coverage to urban households, a residency test is required. For the first category the monthly subsidy amounts to Mt 3,000 a member of a household exceeding five members. It has been estimated by the authorities that at least 120,000 households would be covered by the program, corresponding to 25 percent of urban Mozambican households. The cost of the program is estimated at Mt 18 billion a year (1.3 percent of 1990 GDP). The effective starting date of the program was slowed by the need to introduce appropriate mechanisms to control eligibility.

Conclusions

Poverty is widespread in Mozambique, affecting a large portion of both the rural and urban populations. After a sharp decline in production in 1981–86 during the war, the economic rehabilitation program was introduced in 1987, which aimed at reviving economic activity and reducing financial imbalances through containment of current budgetary expenditure, significant adjustment of the exchange rate, and introduction of tax reforms and major price reforms designed to restore incentives.

During a period of major price adjustments, the purchasing power of the lower-income groups was, overall, protected through wage increases. But at certain times, such as during 1987 and 1988, significant erosions occurred in the purchasing power of wages. Poverty remained widespread in the countryside because of the war, but was alleviated by a wide-ranging emergency program of distribution of food and other necessities. However, this program could not reach all the population severely affected by the war because of the lack of security and of transportation equipment. Also, insufficient amounts of food aid kept the distributed rations below the amounts required. In addition to the poverty relief measures, the government endeavored to stimulate rural production through the provision of inputs, improved access to markets, and better price incentives. The effect of these policies has been favorable, and significant increases were registered in agricultural production during 1987–90.

In the urban areas, the main instrument for ensuring food security is a rationing system that aims at providing food corresponding to approximately two-thirds of the caloric requirements. Price subsidies were largely eliminated in 1987–89, with subsidies remaining only on yellow maize, an inferior commodity. This scheme, however, is inadequate to provide security for large families or households that have no significant income. For this reason, an income supplement scheme for urban households was developed in 1990 and implemented in 1991.

The available evidence—based on the purchasing power of minimum wage levels, on producer prices, and on the actual availability of goods—suggests that the ERP, by stimulating food production in areas where adequate security exists, improved prospects for the poor. While poverty remained widespread, and available social indicators showed that little progress was registered in this area during 1986–89, purchasing power gains were attained by urban wage earners and rural producers. In addition, under the ERP, GDP per capita resumed its growth during the 1987–90 period.

Note: This chapter is an abridged version of IMF Working Paper 91/101 (Washington: International Monetary Fund, 1991), The authors are grateful to Ke-young Chu for his useful suggestions in preparing this paper.

Green defined absolute poverty as monthly per capita household income being so low that at least half is absorbed by the cost of the basic monthly food ration. Income survey data are available only for an estimated 10 percent of the poor (in urban areas) who earn wages in the formal sector (see R. Green, 1989, Estudio SDA: Social Dimensions of Adjustment [the Green Report], unpublished).

A part (60 percent) of the paychecks of emigrant miners in South Africa is remitted directly at the official rate through the central bank of Mozambique. The miners can dispose freely of the remaining part or remit it to be exchanged at the more favorable parallel market rate.

Green (1989).

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