Mozambique
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
23 Jan 1997
eISBN:
9781451827033
Language:
English
Keywords:
ISCR; CR; U.S. dollar; exchange rate; private sector; foreign aid; banking system; terms of trade; fund staff authorities; balance of payments; structural adjustment
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This paper reviews economic developments in the Republic of Mozambique during 1990–96. Under the Economic and Social Rehabilitation Program (ESRP), the economy has made impressive economic gains. Real GDP growth averaged 6.7 percent in 1987–95, despite the civil war, a decline in the terms of trade, and natural disasters. Investment and export volumes are growing rapidly. These achievements have been capped in the last two years (1995–96) by a dramatic decline in inflation—from 70 percent in 1994 to 13 percent in the first eight months of 1996.

Abstract

This paper reviews economic developments in the Republic of Mozambique during 1990–96. Under the Economic and Social Rehabilitation Program (ESRP), the economy has made impressive economic gains. Real GDP growth averaged 6.7 percent in 1987–95, despite the civil war, a decline in the terms of trade, and natural disasters. Investment and export volumes are growing rapidly. These achievements have been capped in the last two years (1995–96) by a dramatic decline in inflation—from 70 percent in 1994 to 13 percent in the first eight months of 1996.

I. Introduction

1. In 1987, with the economy in collapse as a result of civil war and other exogenous factors such as unfavorable weather, the Government launched an Economic Rehabilitation Program (ERP).1 The ERP involved a fundamental shift to market-based economic policies and structural reforms, and was (and continues to be) supported by successive arrangements under the Fund’s structural adjustment facilities (SAF and ESAF)2 and by World Bank structural adjustment loans. The benefits of economic liberalization were reinforced by the return to peace in 1992 and the subsequent political democratization, which boosted economic confidence and paved the way for the recovery and growth of private investment.

2. Major economic reforms undertaken to date include the unification and liberalization of the exchange rate, and the creation of an interbank foreign exchange market; trade liberalization and the reform of the import tariff structure and of the regime of exemptions; elimination of most price controls; privatization, liquidation, or leasing to the private sector of over 750 public enterprises; and financial reforms, including the liberalization of interest rates. Fiscal policy has been tightened through a reduction of current spending and, in the earlier years, an increase in tax revenue in relation to GDP, and in 1995 government savings were positive for the first time in thirteen years.

3. Under the ESRP the economy has made impressive economic gains. Real GDP growth averaged 6.7 percent in the period 1987–95, despite the civil war, a decline in the terms of trade, and natural disasters. Investment and export volumes are growing rapidly. These achievements have been capped in the last two years by a dramatic decline in inflation—from 70 percent in 1994 to 13 percent in the first eight months of 1996.

4. Nevertheless, major economic and social problems remain. (1) With a 1995 per capita income of US$100, Mozambique is one of the poorest countries in the world; 60 percent of the population is estimated to live in absolute poverty, using poverty criteria employed by the United Nations This increases the urgency of actions to stimulate economic progress and alleviate poverty. (2) The economy, which is still largely agriculture–based, is highly vulnerable to exogenous forces such as weather and world market conditions and highly dependent on external aid flows. (3) Substantial parts of the infrastructure need to be rebuilt following destruction or neglect during the civil war, and the rest needs to be modernized. (4) The country has a very heavy external debt burden—in 1995 the external debt was 377 percent of GDP and actual debt service payments amounted to 27 percent of exports of goods and nonfactor services—which will exert a drag on growth unless substantial debt relief is obtained. (5) Finally, though much progress has been achieved in the area of structural reform, several problems remain: public (particularly tax) administration is weak, there is still a large and inefficient public enterprise sector, financial markets are relatively underdeveloped, and marketing systems are inadequate.

5. The Government’s ESRP for the period 1996–99 is an extension of previous programs. It continues to emphasize prudent financial management and structural reform to facilitate growth and lower inflation, and actions to reform and strengthen the social safety net. In support of the latest ESRP, in June 1996 the Fund approved a new three–year ESAF arrangement, and the first annual arrangement thereunder; and the World Bank is currently appraising its Third Economic Recovery Credit. In November 1996 the Paris Club will be considering a request by the Government of Mozambique for a debt rescheduling agreement.

II. Production and Expenditure3

A. Main Trends in the National Accounts

Real GDP growth

6. Since 1987, Mozambique’s structural adjustment program has been supported by successive arrangements under the structural adjustment facility (S AF) and the enhanced structural adjustment facility (ESAF). During this period, Mozambique has made good progress toward reversing economic decline, reducing macroeconomic imbalances, and liberalizing its economy. Despite civil war, a decline in the terms of trade, and natural disasters, the economy grew at an average annual rate of 6.7 percent in the period 1987–95. In the five years 1991-95, annual real GDP growth averaged 6 percent, while growth of private consumption and private investment averaged 0.4 percent and 12.4 percent, respectively. During the same period, exports of goods and nonfactor services grew at an average annual rate of 10.6 percent, while imports of goods and nonfactor services declined by 1.9 percent (Table 1 and Figure 1).

Table 1.

Mozambique: Gross Domestic Product, 1991-95

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Sources: National Directorate of Statistics; National Directorate of Planning; and staff estimates.

Grant financed technical assistance not included.

Volume growth rates based on growth of value at previous year’s prices.

Figure 1.
Figure 1.

Mozambique: Selected National Accounts Indicators, 1987-95

Citation: IMF Staff Country Reports 1996, 142; 10.5089/9781451827033.002.A001

Sources: International Financial Statistics; data provided by the Mozambian authorities; and staff estimates.

7. Real GDP growth was a modest 1.5 percent in 1995. There was vigorous expansion in the productive sectors, but this was partly offset by a sharp contraction in government services on account of the elimination of the special programs associated with demobilization, resettlement and elections, which accounted for 6 percent of GDP in 1994. In fact, nongovernment gross output grew by 8.3 percent and nonservices gross output by 10.4 percent, led by strong growth of industry and fishing (16.3 percent) and transport and communications (13.1 percent).

8. Economic growth has recovered strongly in 1996. The 1995/96 crop was excellent in spite of floods and agricultural output in 1996 is expected to exceed initial forecasts. Industry (particularly construction materials, energy, and manufacturing) also continued to expand very rapidly, reflecting the effects of political stability, privatization, and other structural reforms. Real GDP growth in 1996 is expected to be around 6 percent.

9. In 1995, all GDP expenditure components showed a decline in real terms except for exports of goods and nonfactor services. Private consumption is estimated to have decreased by 10.5 percent and public consumption by 36.5 percent due to the sharp contraction in government services on account of the elimination of the special programs. Total investment fell by 2 percent. Imports of goods and nonfactor services declined by 18.1 percent, reflecting the slowdown in economic activity and domestic demand, while exports of goods and nonfactor services increased by 16 percent.

10. In 1995, the resource gap4 vis-à-vis the rest of the world narrowed, corresponding to declining domestic consumption and investment relative to GDP.

Savings and investment

11. Since the return to peace in 1992, private investment has increased significantly and has more than compensated for a small decline in public investment in relation to GDP (Tables 2 and 3, and Figure 1). As a result, gross domestic investment has shown an upward trend since 1991.

Table 2.

Mozambique: Savings and Investment, 1991-95

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Sources: National Directorate of Statistics; National Directorate of Planning; and staff estimates.

GDS = GDP - total consumption = gross investment + exports of goods and nonfactor services - imports of goods and nonfactor services.

Current budgetary revenue - current budgetary expenditure net of net factor income from abroad.

Residual.

External interest payments on a commitment basis.

GNS = GDS + net factor income from abroad + net unrequited transfers.

External current account deficit.

Grant financed technical assistance not included.

Table 3.

Mozambique: Availability and Uses of Resources, 1991-95

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Sources: Tables 1 and 2.

Imports of goods and nonfactor services minus exports of goods and nonfactor services.

(3) = (1) + (2) = (4) + (5).

(6) = (5.a) + (5.c) = (7.a) + (7.b).

Grant financed technical assistance not included.

12. The increase in private investment appears to have been financed entirely by higher domestic savings5, which have also grown rapidly since 1991. Public sector savings increased by 5 percentage points of GDP between 1991 and 1995, while private sector savings are estimated to have increased by more than twice that amount. Foreign savings6 have declined since 1993 in relation to GDP.

B. Sectoral Production

Sectoral contributions to gross output

13. Gross output growth rates during 1991-95 closely paralleled those of GDP (Tables 4–6 and Figure 2). In 1995, the growth rate declined to 2.1 percent, from 6.6 percent in 1994 and 14.3 percent in 1993, essentially because of the sharp decline in government services. The agricultural sector remains one of the most important sectors of the Mozambican economy, accounting for an average of 25 percent of total output during 1991–95. During the same period, the services and construction sectors increased their relative shares of gross output to 33 and 12 percent respectively. The relative weights of the industrial and transport and communications sectors remained fairly constant at around 17 percent and 13 percent, respectively, of gross output.

Table 4.

Mozambique: Gross Output, 1991-95

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Sources: National Planning Commission; and staff estimates.
Table 5.

Mozambique: Production of Major Marketed Crops, 1991/92-1995/96

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Source: National Commission of Planning.

Metical-dollar conversion made at official annual average rates.

Table 6.

Mozambique: Commercialized Crop Production by the Family Sector, 1991/92-1995/96

(As a percentage of total marketed production)

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Source: National Commission of Planning.
Figure 2.
Figure 2.

Mozambique: Gross Output and Sectoral Production, 1989-95

(1989=100)

Citation: IMF Staff Country Reports 1996, 142; 10.5089/9781451827033.002.A001

Source: National Planning Commission (CNP).

Agriculture

14. Agriculture remains one the main pillars of the economy of Mozambique. However, during the first half of the 1980s, agricultural output fell sharply as a result of the civil war and of rigid controls on producer prices. Notwithstanding the continuation of hostilities until 1992, the liberalization measures initiated in 1987 under the Economic and Social Rehabilitation Program (ESRP) have sought, inter alia, to promote the recovery of the sector by restoring price incentives and minimum living standards for farmers. In addition, development policies for the sector have aimed at improving farmers’ access to markets, inputs, financing, and external aid. Producer prices of agricultural commodities have been gradually liberalized and have generally kept pace with inflation (Table 7).

Table 7.

Mozambique: Prices of Major Marketed Crops 1991/92-1995/96

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Sources: Ministry of Agriculture; and National Planning Commission.

15. Nevertheless, many structural problems have yet to be addressed in the agricultural sector and its output remains but a fraction of the levels attained before independence, when the country was largely self–sufficient in food production. With the advent of peace, a sustained recovery is possible for this sector as small farmers resettle their plots, mined fields are cleared, and farmers’ cooperatives and agro–industrial units resume production for expanded markets.

16. The agricultural season of 1994/95 was very good despite the drought in the south, and in 1995/96 agricultural growth was also very strong despite floods. This was mainly the result of a very good performance of the family sector, whose production of marketed crops increased by 17.9 percent to compensate for a fell of 3.8 percent in the business sector. It is estimated that subsistence production maintained its growth at 5 percent in 1995/96.

17. The evolution of production on some crops illustrates the recent performance of the sector. Production of cashew nuts, the leading export crop, remained relatively stable in 1994/95 and in 1995/96 despite the increases in producer prices. However, preliminary figures for 1996/97 show a total production of 65,000 tons, about double the level of 1994/95. Production of cotton has remained at around 50,000 tons since 1993/94. The cotton industry has been substantially restructured since 1988 through land redistribution from the loss–making parastatal company to the family sector and through privatization of some of the ginning mills. Copra output fell in 1994/95 to 26,000 tons, from 30,000 in 1993/94, but recovered in 1995/96 to 34,000 tons. Production of tea, particularly important before independence, fell sharply in 1994/1995 to 980 tons from already depressed levels, as the plantations have been left unattended. However, during 1995/1996 production recovered and increased up to 1,500 tons. Production of sugar increased by 34 percent in 1994/95 and by 48 percent in 1995/1996, reaching 434,000 tons in the latter year. Mozambique has preferential access to the U.S. and EU markets under quota agreements.

18. Commercial production of basic foodstuffs increased significantly in 1995/96. The production of maize, the most important food crop grown by the family sector, was up by a 9 percent. The production of rice, which had declined sharply in 1994/95, increased by 67 percent in 1994/95 but did not reattain its 1993/94 level.

19. Chicken production, which has replaced beef production as the major livestock activity, continued to grow very strongly in 1995 (Table 8). However, beef and pork production declined, the latter by 72 percent because of an upsurge of the African swine disease.

Table 8.

Mozambique: Marketed Livestock, 1991-95

(In units stated)

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Sources: Ministry of Agriculture; and National Planning Commission.

Meticais per kilogram.

Meticais per unit.

Meticais per liter.

Industry

20. Industrial production declined in the five years up to 1994, but recovered strongly in 1995; growth in the latter year was 16 percent (Table 9). One of the main factors behind this recovery is the revival of the processed animal feed, tea, and cashew subsectors. Strong growth was also recorded in the following subsectors: chemicals, nonmetallic mineral products, transport machinery (following the surge in the transportation sector, and electricity (led by the rehabilitation of the transmission lines from Cahora Bassa). However, textile and footwear production continued the downward trend as a result of the collapsed trade agreements with the former Soviet Union.

Table 9.

Mozambique: Industrial Production by Branch, 1992-95

(Current prices, millions of meticais)

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Sources: National Planning Commission; Ministry of Commerce, Industry and Tourism; Ministry of Mineral Resources and Energy, and Ministry of Agriculture and Fishing.
Table 9 (concluded).

Mozambique: Industrial Production by Branch, 1992-95

(Growth of volume, in percent) 1/

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Sources: National Planning Commission; Ministry of Commerce, Industry and Tourism; Ministry of Mineral Resources and Energy, and Ministry of Agriculture and Fishing.

Volume growth rates based on growth of value at previous year’s prices.

Transport and communications

21. The transport sector continued to boom in 1995, growing by 13.3 percent (Table 10). As security is restored throughout the country and damaged infrastructure is repaired, enabling access to areas that had long been isolated, passengers and merchandise are beginning to circulate in larger numbers. Also, transport operators, particularly the railway company, continued to benefit during 1995 from the transportation needs arising from external aid distribution. Regional roads and railway lines to Swaziland and South Africa were reactivated in early 1993 and there is an agreement with South Africa for a transport “development corridor” which would link Maputo with Mpumalanga (Eastern Transvaal) and Gauteng (the industrial heartland of South Africa). Such an agreement would significantly reduce transportation costs and raise the attractiveness of the ports of Maputo and Matola for South African traders (see Box 1).

Table 10.

Mozambique: Transport and Communications Activity, 1991-95

(In units indicated)

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Sources: National Planning Commission; and Ministry of Transport and Communications.

Meticais per ton-kilometer.

In millions of meticais per ton.

In billions of meticais.

Meticais per passenger-kilometer.

22. During 1995, railroad freight volumes per kilometer of track continued the increasing trend started in 1991, growing by 37 percent. Railway passenger traffic almost doubled in 1995, despite an increase in tariffs, and road passenger traffic increased by 40 percent. The expansion in land transportation resulted in a corresponding drop in air traffic, which led to financial difficulties of the stated owned airline (LAM). Maritime traffic increased by 25 percent in 1995, reflecting the improved facilities at the Maputo port, and this was also reflected in a 17 percent increase in port throughput.

Mozambique—Note on the Maputo Corridor Project

At a private sector investor’s conference held on May 6, 1996, President Chissano and South Africa’s President Nelson Mandela launched a number of projects designed to revive the road and rail link between Gauteng, South Africa’s industrial heartland, and the port of Maputo. Until the 1970s, this corridor carried half of Gauteng province’s foreign trade, and it is expected that its reactivation would reduce the congestion suffered by alternative South African ports and increase South Africa’s competitiveness at the same time as providing export earnings and a development pole to Mozambique. This development project is expected to be overwhelmingly private–sector financed.

The largest single component of this project is the construction of a 50 km toll road, which will cut the distance from the South African border to Maputo from 122 kms to 86 kms. A tender for the R1 billion contract (US$225 million) has already been issued. It will be awarded on a build–operate–transfer basis, whereby a private–sector group will build the road and operate it on a toll basis for an agreed period. Construction is expected to begin in late 1996. The existing railway between Gauteng and Maputo will also be upgraded. Current estimates put the cost of improving the port of Maputo at about R550 million. Much of the money will be spent on the rehabilitation of terminals and dredging the port to allow for freighters of up to 60,000 tons.

A development company, the Maputo Corridor Company, was set up on July 27, 1996. Its function is the rehabilitation and management of the port of Maputo and the rail link to the South African border. The company is 51 percent privately–owned, although it has participation from government agencies in both Mozambique and South Africa, including CFM, the national railways of Mozambique, which will have a 30 percent share.

Among the private sector projects under consideration in the context of the Maputo Corridor, two of the most important are an aluminum and a fertilizer plant to be located near Maputo.

23. In 1994-95 sharp increases in transport tariffs were made with a view to setting prices closer to market conditions. In the case of urban transportation fares, prices rose by 25 percent during 1995. Railroad fares were increased by 40 percent. Domestic airfares, which had long been cross–subsidized by international airfares, were also increased significantly—and more frequently—to reflect the depreciation of the metical and, when warranted, higher fuel costs.

24. The two largest public enterprises in the transportation sector, the railway company (CFM) and LAM, are facing financial difficulties. A restructuring plan and leasing agreements under various joint ventures has been approved for CFM. LAM is currently on the list of parastatals for sale.

25. Notwithstanding the surge of the past five years, transportation remains a sector with considerable growth potential, and the Maputo Corridor Project with South Africa will help realize this potential. The main deep water harbors (Maputo, Beira, and Nacala) are still substantially under–utilized, and the main constraint is the CFM’s lack of capacity to handle higher volumes of merchandise.

Construction and services

26. Construction activity expanded by 7 percent in 1995. This sector remains very dependent on public works contracts, but in the near future domestic and foreign construction companies are expected to play a major role in the rehabilitation of damaged infrastructure that is slated to be undertaken under the National Reconstruction Program (PRN). Commerce and other services expanded by about 5 percent a year until 1993, reflecting the liberalization of the economy and its increasing openness. However in 1994 and in 1995 the trend reversed.

III. Prices, Wages, and Employment

A. Inflationary Trends

27. Inflation, as measured by changes in the consumer price index (CPI) for Maputo, increased sharply between 1989 and 1994, but has come back down sharply since 1994. Twelve–month inflation fell from 70.1 percent in 1994 to 54 percent in 1995 (Table 11 and Figure 3), and in 1996 the downward trend has been significantly reinforced by the authorities’ liberalization reforms and tough anti–inflation policy stance, the strong supply response of the economy, and the relative stability of the exchange rate. Inflation declined to 13 percent in the first eight months of 1996.

Table 11.

Mozambique: City of Maputo Monthly Consumer Price Index, December 1989-December 1995

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Source: National Planning Commission.

As compared with same month one year earlier.

Monthly average of the previous 12 months.

In December 1989, the National Planning Commission (CNP) began compiling a new CPI series.