Mozambique
Recent Economic Developments
Author:
International Monetary Fund
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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.

Figure 3.
Figure 3.

Mozambique: Consumer Prices, 1987 - August 1996

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

Source: National Planning Commission (CNP).

28. Inflation in 1995 was mostly a reflection of the rise in prices of foodstuffs, namely cereals, fresh produce, meat, fish, milk, and eggs, which increased by over 50 percent and contributed 42 percentage points to inflation (Table 12). Prices of industrial products rose by 35 percent and contributed 10 percentage points to inflation; energy prices rose by 30 percent and contributed 1 percentage point; and prices of services increased by 60 percent mainly because of the transportation price increases, but only contributed 1 percentage point.

Table 12.

Mozambique: Major Consumer Price Index (CPI) Categories December 1991-December 1995

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Source: National Commission of Planning.

29. There were other structural and policy causes for the high inflation during 1995. On the supply side, domestic food production, although it has increased substantially since 1993, continues to be insufficient. In addition, Mozambique suffers from an inadequate marketing structure. On the policy side, monetary and credit expansion put pressure both on exchange rates and on prices. Wage adjustments do not appear to have been a major factor in the high inflation, as they tended to lag inflation, and purchasing power has been considerably curtailed since 1989.

B. Price Controls and Adjustments

30. During 1995, the Mozambican authorities pursued their commitment to gradual price liberalization and periodic increases in administered prices with a view to maintaining the pass–through of domestic and foreign cost increases. At present, prices for gasoline, diesel, electricity, and housing public rents are set by the Cabinet; other administered prices are set by the National Commission on Wages and Prices (CNSP),7 or by the Ministries in charge subject to approval by the CNSP. During 1994–95, the authorities proceeded with the liberalization of the prices of a few more commodities. Prices of wheat flour, bread, and medical services were liberalized in March 1996. At the moment, only water, electricity, public housing rents, petroleum products, urban transportation fares, and one state-owned newspaper are still subject to price controls.

31. Most producer prices have been liberalized (Table 13). At present, only the following crops are still subject to minimum producer prices: cotton, groundnuts, cashew nuts, copra, sunflower, mafurra, maize, rice, tobacco, and two types of beans. The increases determined by the CNP for producer prices of agricultural products during 1995-96 were quite substantial and in excess of inflation for all products, reflecting international market developments and the depreciation of the metical. However, given the good crop, some of the minimum producer prices had to be transformed into “reference” prices in early 1996, as they proved to be too high.

Table 13.

Mozambique: Minimum Agricultural Producer Prices 1/ 1991/92-1995/96 2/

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Sources: Ministry of Agriculture.

All minimum agricultural prices have become indicative prices in 1996.

Prices are set in the fall before the planting season.

Prices were liberalized in 1995.

32. After having remained unchanged during 1994, petroleum product prices were increased in May and August 1995 and in April and August 1996 (Table 14), to bring them in line with international prices.8 The cumulative increase was of the order of 100 percent for gasoline (premium and regular). In determining the new prices for each oil derivative, the Government seeks to reduce cross subsidization between oil products, as the practice of subsidizing diesel and other fuels at the expense of gasoline had encouraged consumption of diesel, which had risen to some four times that of gasoline.

Table 14.

Mozambique: Increases in Administered Prices of Petroleum Products, 1992–96

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Sources: Ministry of Mineral Resources and Energy; and National Planning Commision.

Wholesale price.

33. The domestic price of petroleum products imported by PETROMOC is based on the international prices (Table 15) converted at the official exchange rate. The import prices in meticais then serve as the basis for a detailed price structure that sets distributors’ margins and leaves PETROMOC a margin to recover costs (Table 16). Under this policy, PETROMOC has not required subsidies from the Government despite increasing competition from the two private oil distributors.

Table 15.

Mozambique: Import Prices of Oil Products, 1991-95

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Sources: Petromoc and International Energy Agency Monthly Oil Market Report.

International prices refer to Rotterdam.

Table 16.

Mozambique: Price Structure of Petroleum Products, Third Quarter 1996

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Source: Ministry of Mineral Resources and Energy

Meticais per kilogram, or US$ per kilogram where appropriate.

Adopted retail prices shown in Table 14 for some products differ slightly from proposal calculation, shown here.

34. In the past, the Government has subsidized urban and intercity transportation, although the private sector has found profitable opportunities in competing with public transportation. Fares were sharply increased during 1995. Utility tariffs were also increased sharply in 1995, with electricity rates going up by 100 percent and water rates by 252 percent Newspaper prices were increased during 1994, from Mt400 to Mt 1,000, and remained constant thereafter.

C. Population and Labor Market

35. Demographic trends in Mozambique continue to be characterized by rapid population growth (an estimated 2.9 percent a year in 1994). The resettlement of people to their places of origin after the massive displacements during the war has been completed faster than expected. Total population is estimated to be larger than the official 16–17 million—around 18 million according to recent estimates of the National Statistics Board. The rapid population growth can pose important problems related to poverty, income distribution and development. Given the importance of this issue, the Government is preparing to launch a population and housing census in 1997.

36. The situation in the labor market is difficult to assess, given the dearth of statistics on wages, employment, labor force, and productivity. In addition, the subsistence and informal sectors still provide the only income source for an estimated two thirds of Mozambicans. The main features of the labor market are typical of a developing country—excess supply of unskilled labor, acute shortages of skilled labor, and very low productivity levels. Since 1990, the problems of unemployment have been compounded by the return of migrant workers from the former German Democratic Republic and from South Africa.

37. The only private sector wage indicators available in Mozambique are the minimum monthly wage scales. Minimum wages in Mozambique are set every year by a tripartite forum consisting of the government, the employers and the unions. The minimum wages are fixed for three main categories of employees: agricultural workers, nonagricultural workers and technical/administrative personnel (Table 17). Based on information available, minimum wages for the two latter categories differed on average only by 3.5 percent during 1987–1996 and were effectively identical since the second half of 1991. However, minimum wages of the agricultural employees were on average lower by 40 percent. 9 This year’s negotiations were completed in July and the minimum wage was increased by 24 percent, slightly above the expected inflation for 1996 (22 percent).

Table 17.

Mozambique: Increases in Minimum Monthly Wage Scale, 1991-96

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Source: Ministry of Labor.

38. Limited information is available on wages in general. However, some informative comparison is possible. The National Directorate of Statistics conducts a small sample survey of employment and wages every year. The survey in 1995 covered 430 companies from 10 different subsectors. Their results seem to support the hypothesis of generally lower wages in the agriculture sector. In particular, the average wage in agriculture is only around 30 percent of average wage for all sectors for the two sample years available (1994 and 1995).

39. Real minimum wages (the nominal minimum wage deflated by the consumer price index), increased since the beginning of the first SAF program in 1987 by 28.5 percent for agricultural workers, by 29.1 percent for technical/administrative workers, and by 16.2 percent for other nonagricultural workers. They increased as inflation decelerated at the beginning of the stabilization program (1987–1989), but declined as inflationary pressures picked up from 1990 until 1994. An upward turn was observed again as inflation began to subside in 1995. While the current level of minimum wages may not be high by world standards, one should keep in mind that the income per capita in Mozambique is about US$100 per year. Also, it may be worth noting that neighboring countries, such as Malawi, Zambia, and Zimbabwe do not have minimum wage legislation.

40. The public sector labor market indicators available refer to civil service employment and its salary structure. The size of Mozambique’s civil service is small. In 1996 the number of civil service employees reached 101,186, which represents 0.6 percent of the population.

41. Salaries of the government employees were adjusted every year in a manner that preserved the spread between the lowest and the highest tier at the ratio 1:16 8. In 1990, the payroll structure was simplified and the matrix structure was reduced to three categories by tiers from A to Z. Until 1992, salary adjustments were made in line with the average inflation, broadly keeping some stability for the real wage. However, in 1993 with the “concertação social” and the pressure of austerity measures, lower–end wages were raised faster than higher–end ones. As a result, the spread today is less than 1:9.1. The GINI coefficient corresponding to the 1996 civil service salary structure is equal to 0.22, which implies a relative equal wage distribution.10

IV. The Government Finances

A. Introduction

42. The public sector consists of the central government, 11 provincial governments, local governments, and public enterprises. The finances of the provincial governments are consolidated with the central government budget; they represent only a small proportion of the total. Only partial data are available on the local governments and public enterprises, and as a result there is no statement of the consolidated public sector financial position.

43. The fiscal year is the calendar year. Since the budget and the fiscal accounts for monitoring purposes are prepared on a cash basis, there is a complementary period from January through March that covers commitments for both current and investment expenditures from the previous fiscal year. In any year, expenditures brought over from the previous year are netted out against expenditures that are expected to be carried over to the next year. This net float, called the net complementary period, is added to expenditures accruing in the current year to give total budgeted expenditure for that year.

44. The size of the public sector appears to have shrunk significantly since the late 1980s as a result of an ongoing program of privatization of public enterprises. Since 1989, over 750 enterprises have been sold, liquidated, restructured as joint ventures, or leased to the private sector, with more than half of the privatizations and liquidations taking place since 1994 (Tables 18 and 19).

Table 18.

Mozambique: Evolution of Public Enterprise Reform Program, 1989-95

(Annual figures)

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Source: Direccao do Patrimonio, Ministry of Finance and Planning.
Table 19.

Mozambique: Status of Public Enterprise Reform Program

(As of August 31, 1996)

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Source: Direccao do Patrimonio, Ministry of Planning and Finance.

B. Overall Trends in the Government Finances

45. In the 1990s the government’s overall deficit before grants has fluctuated between 20 and 30 percent of GDP, reflecting fluctuations in both savings and investment behavior. During 1991–94 the current deficit averaged 2.6 percent of GDP, and investment and net lending 23.2 percent of GDP (Tables 23 and 24). The underlying fiscal position in this period was stronger than indicated, however, because expenditures were exaggerated by nonrecurrent costs associated with the severe drought in 1991–92 and with special programs in 1993–94 related to demobilization, resettlement, and elections.

Table 20.

Mozambique: Expenditure on the Social Sectors, 1991-95

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Source: Ministry of Planning and Finance

Salaries and wages correspond to the budget entry “salaries and wages” for the corresponding sectors. The same holds for goods and services.

Food subsidies correspond to the item “price subsidies” in the budget table.

The first two lines of social subsidies are GAPVU’s activities. Both income transfers and food supplements are paid in cash, but different criteria are used in their allocation.

Locally financed expenditure only. Taken from the table “Public Investment with Own Resources.”

Includes special expenditures in 1994.

Table 21.

Mozambique: Number of Households Receiving Food Subsidy Assistance, December 1991-December 1994

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Source: Ministry of Finance, Office for Vulnerable Population Initiatives (GAPVU).

Malnourished children up to 5 years of age.

Pregnant women who are underweight relative to their gestation period.

Elderly people without means of subsistence living alone or in households with no wage earners.

Seriously handicapped people over 18 years old living in poverty and without physical capacities to make a living.

Households headed by women, with more than five children and chronically ill.

Table 22.

Mozambique: Budget Subsidies to Loss-Making Enterprises, 1991 -96

(In millions of meticais, unless otherwise specified)

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Source: Ministry of Finance.
Table 23.

Mozambique: Government Finances, 1991–95

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Sources: Mozambican authorities; and Fund staff estimates.

Provision for payment of interest on debt to non-Paris Club creditors.

Current revenue minus non-interest current expenditure.

Overall balance plus interest payments and net lending.

Overall balance plus external grants and project disbursements.

Table 24.

Mozambique: Government Finances

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Mozambican authorities; and Fund staff authorities.

46. In 1995, mainly as a result of the termination of the special programs (which accounted for 6 percent of GDP in 1994), the current balance turned from a deficit of 5.2 percent of GDP to a surplus of 1.7 percent of GDP. In addition, investment spending declined by about three percentage points of GDP, and the overall deficit before grants narrowed from 29.7 percent of GDP in 1994 to 20.9 percent of GDP in 1995. In the first half of 1996, as in the corresponding period of 1995, a small current surplus was registered. However, the overall balance before grants widened to 9.6 percent of GDP (from 8.3 percent of GDP in the first half of 1995) because of higher capital expenditures.

C. Revenue Trends

47. Total revenue declined from 21.8 percent of GDP in 1991 to 17.6 percent of GDP in 1994, reflecting a decline in tax revenue from 18.5 percent of GDP to 16.1 percent of GDP and of nontax revenue from 3.3 percent of GDP to 1.5 percent of GDP in this period. The declining trends were reversed in 1995, when tax revenue rose to 16.7 percent of GDP and nontax revenue increased slightly. As a result, total revenue increased to 18.3 percent of GDP in 1995. In the first half of 1996 revenue showed a small further growth compared with the first half of 1995, because of higher tax collections.

48. The decline in tax revenue until 1994 stemmed from a contraction in the industrial sector which adversely affected company and consumption tax collections, the severe drought of 1991/92, which led to an increase in emergency–related import tax exemptions, a weakening of customs administration since 1993, and an upsurge in smuggling as access to neighboring countries improved with the return to peace in 1992. Since 1995 the authorities have been taking steps to strengthen customs administration and reduce the number of exemptions. Decree 7/92 granting exemptions for “emergency aid” was abrogated in late 1995, and the blanket exemption from import duties granted to Mozambican miners working in South Africa was replaced in early 1996 with a more narrowly focused provision that allows miners only limited exemptions. As a result, in 1995 import duty collections increased somewhat following the sharp decline over the previous two years. This, together with a recovery in consumption tax collections on beer and soft drink sales (that reflected a strong recovery in industrial production) explains the increase in tax collections in relation to GDP in 1995.

49. The contribution of tax revenue to total revenue increased from 85 percent in 1991 to 91 percent in 1995, and the contribution of nontax revenue declined correspondingly (Table 25 and Figure 4). Furthermore, the relative importance of indirect taxation in the tax system increased in this period. Indirect taxes accounted for 75 percent of total revenue in 1995, compared with 67 percent in 1991, the increase occurring mainly in domestic taxes on goods and services. The major indirect taxes are a turnover tax, a consumption tax, an excise tax on petroleum products, and customs duties (including a 5 percent customs handling fee); these accounted for 96 percent of indirect tax collections in 1995. Direct taxes comprise essentially taxes on income and profits. Their contribution to total revenue declined from 17.7 percent in 1995 to 16.6 percent in 1995.

Table 25.

Mozambique: Government Revenue 1991-95

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Sources: Mozambican authorities; and Fund staff estimates.
Figure 4.
Figure 4.

Mozambique: Composition of Budgetary Revenues and Expenditures, 1995

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

Source: Ministry of Planning and Finance.

50. The main sources of nontax revenue are rents from real estate, fishing licences and other fees, and social security contributions of government employees. The relative importance of nontax revenue has been declining since the early 1980s because of the failure to adjust rents, fees, and charges in line with inflation. Adjustment of rents is a structural benchmark in the current three–year arrangement under the ESAF, but the impact on revenue will be offset by the ongoing program of sale of government property.

D. Current Expenditure Trends

51. Total expenditure and net lending remained at approximately 47 percent of GDP for most of the period 1991–94, then declined to 39 percent of GDP in 1995 because of the elimination of special expenditures as mentioned above and a decline in foreign–financed capital expenditure. The share of current expenditure in total expenditure and net lending declined from 51 percent in 1992 to 43 percent in 1995, and the share of investment spending rose from 46 percent to 56 percent. The share of current spending continued to decline in the first half of 1996.

52. The main components of current expenditure are defense and security, wages and salaries, other goods and services, and external interest. The declining share of current expenditure in total expenditure reflects mainly a decline in expenditure on defense and security. From the early 1980s until 1994, expenditure on defense and security was by far the largest component of current expenditure. However, its share of total expenditure and net lending fell from 28 percent in 1985 to 17.5 percent in 1992. The share increased in 1993 and 1994 because of demobilization and resettlement expenses, but fell sharply to 10 percent (4 percent of GDP) in 1995 and to less than 9 percent in the first half of 1996.

53. The decline in expenditure on defense and security made room for small increases in expenditure on the wage bill and other goods and services. The wage bill (including salary bonuses) on average accounted for 10 percent of total expenditure and net lending (4 percent of GDP) in the period 1991–95, compared with 9 percent during 1987–90; expenditure on goods and services accounted for 11½ percent (5 percent of GDP), compared with 8.5 percent during 1987–90. The increases reflect partly the additional recurrent costs of higher investment spending and the special expenditures in the period 1991–94. Also, in the case of the wage bill, employment has been rising in key sectors of priority such as education and health.

54. External interest payments averaged 6 percent of total expenditure and net lending (2¾ percent of GDP) during 1992–95. This figure is not comparable with the share in earlier periods because of the inclusion of interest payments that were previously settled by the Bank of Mozambique outside the budget. Interest payments are on a cash basis, and so exclude payments due on debt to Russia.

E. The Public Sector Investment Program

55. On average 75 percent of capital expenditure is financed by foreign loans or grants, which means that movements in capital spending depend substantially on the availability and speed of disbursement of external financing. However, the size and speed of project disbursements is conditioned to some extent by the availability of domestic counterpart funds and the public sector’s absorptive capacity. Absorptive capacity is limited by weak project planning and implementation capability, which is partly the result of lack of qualified staff. The authorities are seeking technical assistance for institution strengthening in this area.

56. A major problem of public investment planning, however, is the limited information the authorities have on the size and distribution of public investment. In 1990 a rolling three–year public investment program was instituted, which aims at bringing all investment, especially that financed with foreign aid, under the purview of the government budget. Also, greater care is being taken to properly classify current and investment expenditures and to separate physical investment from technical assistance. Still, at present the authorities rely substantially on the donors for information on external financing flows, particularly grants, and the figures for externally financed investment are estimates only. A fiscal management review being conducted in collaboration with the World Bank will help resolve these problems. Inter alia, the review seeks to improve foreign aid and public investment management as well as the data base on inflows and uses of foreign aid.

57. Investment allocation in the public sector investment programs, including the current (1996–98) one, have reflected the Government’s concern with poverty reduction as well as economic growth (Table 26). The programs therefore place emphasis on human capital development, an improvement in the quality and quantity of social services, and restoration and expansion of the economic infrastructure (particularly the rural infrastructure). Specifically, the current program emphasizes health (especially primary health care facilities), primary and secondary education, water development, and economic infrastructure (particularly transport and communications). One–third of resources are allocated to health and education, and another one–third to transport and communications.

Table 26.

Mozambique: Locally-Financed Public Investment by Sector, 1991-95

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Source Mozambican authorities.

F. Financing Operations

58. The government budget is critically dependent on foreign financing. Foreign loans (net of amortizations) and grants on average financed 99.2 percent of the overall deficit before grants during 1991–95. Grants by far constitute the main form of foreign financing; they covered 76 percent of the overall deficit before grants in the above period. The dependence on external financing makes budget execution and domestic financing extremely vulnerable to fluctuations in the disbursement of foreign aid. Shortfalls in disbursements, if they are foreseen, are normally accompanied by expenditure cutbacks. However, where the shortfall is unforeseen and expenditure commitments are already made, higher–than–expected bank financing can result.

59. In the period 1991–95, 63 percent of external financing was project–specific. The remaining 37 percent were counterpart funds generated from foreign aid disbursements. Foreign aid may be disbursed in kind or in cash (foreign currency). In either case, the recipient must deposit to the government’s account at the Bank of Mozambique the local currency equivalent of the value of the goods received or the foreign exchange made available. Most counterpart funds are freely available to the Government for general budgetary support. Shortfalls of counterpart funds financing can also occur, even if the aid has been disbursed by the donor, if a recipient of commodity aid fails to pay the counterpart funds to the Government, or does so with a delay. Since late 1992 the Government has been requiring letters of credit from recipients of commodity aid, by which the issuing bank guarantees payment of the counterpart funds within a specified time limit.

V. FINANCIAL SECTOR DEVELOPMENTS

A. Introduction

60. The period since the separation of the Commercial Bank of Mozambique (BCM) from the Bank of Mozambique (BM) in 1992, has been one of profound, albeit unfinished, transformation in the structure of Mozambique’s financial sector. In addition to the four foreign–owned private banks in operation at end–1993, a new private bank with mixed domestic and foreign ownership began operations late in 199S while a credit cooperative and a leasing company began operations in 1996. One more bank has been licensed, but has not yet started operations. The BCM was privatized in July of 1996, and two of the foreign banks merged, bringing the total number of private monetary institutions in operation to five. The share of nongovernment deposits and of lending to nongovernment sectors in the hands of the smaller private banks (excluding the BCM)—30 percent and 23 percent, respectively, in June 1996—is growing steadily, increasing the competitiveness of the sector.11 Moreover, ownership of private financial institutions has been diversifying, with increasing participation of domestic, South African and Zimbabwean capital, in addition to the traditional Portuguese presence.

61. Direct instruments of monetary control—central bank credit and ceilings on commercial bank credit—continue to be the main monetary instruments, but the importance of indirect instruments has increased over this period. Bank lending and deposit rates were fully liberalized in June 1994 and the authorities have maintained positive real rediscount rates since the beginning of 1995. The consistent application of the rediscount rate plus 2 percentage points to reserve shortfalls and bank overdrafts with the BM since late 1995 has contributed to the strengthening of BM monetary control. The establishment of an interbank foreign exchange market in February 1996 and extension of the reserve requirements to foreign exchange denominated deposits has furthered the scope for indirect monetary intervention. Currently, the establishment of a money market is under way.

62. Significant improvements in the efficacy of the payments system in the past year and a half have helped reduce the extent of the interbank float and contributed to improved liquidity management of commercial banks. The lag in producing final balance sheets has been reduced from three months in 1993, to two months for the banking system and one month for the BM. However, the lags are still excessive for timely policy analysis, and, while the quality of the monetary data has improved, they are still lacking in transparency, timely recording and detail. The size of other items net of the banking system has been reduced and continues to exhibit a declining tendency, albeit with wide fluctuations from month to month.

B. Recent Developments in Monetary Policy

63. Monetary expansion exceeded program targets in every year of the economic reform until 1995 (Tables 27 and 28). The stock of money grew by 57.6 percent in 1994 and by 57.4 percent in 1995 owing to a strong expansion in foreign exchange denominated deposits and a fast–depreciating exchange rate. However, 1996 appears so far to have been a pivotal year. In the first half of the year broad money grew by 4.4 percent, well below the program target (9 percent), and monetary policy appeared to remain tight in the third quarter of the year.

Table 27.

Mozambique: Monetary Survey, 1991-96

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Sources Bank of Mozambique; and Fund staff estimates.

Program figures adjusted for provision for non-payment of non-Pans Club interest.

Government earmarked funds (GEF) and other assets net in 1991 suffer a scries break as they have been revised from 1991 onwards, principally eliminating an adjustment which inflated domestic-currency-denominated GEF; the adjustment was mirrored in other assets net. In the process, some minor revisions were also done to other aggregates.

Flows admisted for exchange valuation up-to-end-1995 at actual rates therefore at perfomance rates.

Table 28.

Mozambique: Summary Accounts of the Bank of Mozambique, 1992 - 1996 1/

(In billions of meticais)

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Sources: Bank of Mozambique; and Fund staff estimates.

The central bank and commercial operations of the Bank of Mozambique were separated in 1992. Accounts for earlier years are not comparable.

Entirely to the IMF.

Government earmarked funds have been revised historically to eliminate an adjustment which inflated domestic currency denominated GEF; the revision is mirorred in OIN.

Actual; bank reserve deposits over public’s total deposits.

64. Developments in the first half of 1995 were encouraging. Although the June net foreign assets (NFA) target was missed by approximately US$3 million, the net domestic assets (NDA) expansion stood well within program limits, despite a shortfall in net government repayments to the banking system. However, conditions deteriorated soon thereafter, and by year–end the NDA expansion exceeded both the original and revised program figures. As the contractionary effect of net government repayments to the banking system and government earmarked funds fell substantially short of expectations, while repayments of medium and long term liabilities were larger than expected, containment of credit to the economy and of other items net did not suffice to keep NDA within its ceiling.12

65. In 1994 and 1995 credit to the economy was the primary expansionary factor. Credit to government played a contractionary role as the government made net repayments to the banking system (albeit below program targets). NOA which, in 1993, had increased significantly as a result of an expansion of internal regularization accounts and interbank float, is no longer a key factor in monetary expansion, although it remains large. This reflected the switch in mid–1994 from credit ceilings to ceilings on the NDA of individual banks, improvements in the payments system, and improvements in banks’ accounting practices.

66. In the fourth quarter of 1995 and early in 1996 a series of measures were introduced that in effect constituted a sharp tightening of monetary policy. Principally, penalty rates were consistently applied to overdrafts, and later to reserve shortfalls. In February 1996 the reserve requirement was lowered from 25 percent to 15 percent and extended to foreign currency deposits with a contractionary net effect. Regular monthly reviews of commercial bank portfolios and loan collection policies were instituted in addition to closer monitoring of credit ceilings and reserve requirements. Finally, the BM sharply restricted its lending to commercial banks; credit is now extended only for the use of import support funds, and for on–lending of two World Bank–financed projects in support of industrial recovery and small and medium size enterprise rehabilitation. The interest rate on import support refinancing operations was raised to 46 percent. Also, the BM has continued to maintain the rediscount rate positive in real terms (Figure 5).

Figure 5.
Figure 5.

Mozambique: Rediscount Rate, 1987 - August 1996

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

Sources: Bank of Mozambique; and National Planning Commission.1/ Deflated with backward looking three-month average inflation.

67. These measures have all contributed to a decline in commercial bank borrowing from the BM and a build–up in their reserves; they also slowed down the expansion of credit to the economy. In the six months to June 1996, base money grew by 7.9 percent, substantially below programmed rates. The NFA and NDA June targets were not met, however, due to a change in World Bank import support disbursement procedures. As a result of this change, the stock of import support funds at the Government’s disposal fell below levels projected in the program, affecting both government earmarked funds (and, therefore, NDA) and NFA.

C. Structural Issues

68. Net bank credit expansion in 1994 and 1995 largely reflected the nonrepayment of bank loans by both traders and public enterprises to the two dominant state–owned banks which in turn ran up overdrafts at the central bank. BCM ended 1994 with a Mt496 billion overdraft, despite a Mt568.5 billion recapitalization program that had aimed at strengthening the bank’s liquidity following a write–off of non–performing loans at end–1993. The adoption of a program of overdraft repayments early in 1995 and again in November helped reduce BCM’s net credit from the BM over the course of 1995. Early in 1996, BCM’s position deteriorated sharply again as government and other deposits were lost to the BM when the latter opened its branch in Beira (see below). The financial situation of the other state–owned bank, the Banco Popular de Desenvolvimento (BPD), deteriorated during the course of 1995, but was then stabilized in the first half of 1996.

69. In mid–1995 the government announced its intention to privatize the BCM by the end of the year, and transform BPD into a joint stock company in 1996. In the event, 51 percent of the ownership in BCM was sold to a consortium of Portuguese, Zimbabwean, and local financial interests in July of 1996. A major portion of its overdraft position was assumed by the new owners, but Mt 195 billion was settled with the Government’s purchase of some of BCM’s non–performing assets. These were paid for from counterpart funds to World Bank import support assistance. The buyers committed to investing US$25 million by the year 1999 in the new bank. A sales advisor has been contracted for the privatization of the BPD, and measures to strengthen its liquidity position and management practices have been undertaken with a view to completing its sale by the end of 1996.

70. Early in 1996 the BM opened a branch in Beira, the second largest regional center. This led to an improvement in the BM’s liquidity management as well as to further improvements in the operation of the payments system.13 The efficacy of the payments system had been steadily improving in the previous year and a half, partly owing to help from Fund technical assistance. Progress was notable in the provision of analytical data describing the results of the clearing process and in the reduction of physical transportation delays relating to the processing of payments transactions in remote areas. This has greatly facilitated commercial bank liquidity management.

71. The BM has also been strengthening its banking supervision as well as own accounting and analytical procedures. Recently, a program of training assistance in banking supervision has been developed with the South African Reserve Bank, while technical assistance has been provided by the WB and will be shortly provided by ODA. A new system of monetary accounts has been prepared, but will require the upgrade of commercial bank technology, as well as training, to implement. The poor accounting and management standards, particularly of the large commercial banks, have been a difficult challenge not yet fully overcome.

VI. Balance of Payments and External Debt

A. Balance of Payments

72. Mozambique’s external accounts have fluctuated considerably in recent years, reflecting adverse supply shocks, a severe drought in 1991–92 and a cyclone in 1994, varying external conditions, and fluctuations in the availability of foreign aid. During 1995, the external accounts improved significantly, reversing the negative trend of the previous four years.

73. Merchandise exports (value and volume) declined sharply in 1992–93 but experienced a strong recovery since 1994 (Tables 30–32 and Figure 6). Despite the recovery, export revenues at US$169 million in 1995 were only 4 percentage points higher than in 1991. Merchandise exports declined by 14 percent in 1992 (5.8 percent in volume terms), reflecting adverse climatic conditions, the suspension of export contracts with the former Soviet Union, and worsening terms of trade. Exports declined further by 5 1/2 percent in 1993 (6 percent in volume terms), as infrastructure bottlenecks particularly in transporting agricultural products, and cumbersome export administrative procedures became evident. Following the implementation of export promoting measures in late 1993, aimed at further simplifying licensing procedures, eliminating remaining export tariffs, and reducing import tariffs, merchandise exports recovered sharply. Exports increased by 131/2 percent in 1994 (12.8 percent in volume terms), in spite of continuing problems with the cashew processing industry (including a ban on exports of unprocessed nuts in mid–1994) and a sharp real appreciation of the currency. Merchandise exports increased further by 13 percent in 1995 (7 percent in volume terms), reflecting further liberalization of the raw cashew export market and improved international prices for Mozambique’s exports.

Table 29

Mozambique: Structure of lnterest Rates, 1991-96

(In percent per annum)

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Source: Data provided by the Bank of Mozambique.

Lending rate levels unified.

All commercial bank interest rates have been freed since June 1994.

Primary sector: commercialization of agricultural products; cooperatives; electricity, gas, and water; industry; exports; construction, public works, and housing; and government transport services.

Private transportation; commerce, restaurants, hotels, and tourism; and all other activities not included in Level 1.

Table 30.

Mozambique: Balance of Payments, 1991-95

(In millions of U.S. dollars, unless otherwise specified)

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Source: Bank of Mozambique; and Fund staff estimates.

Includes demobilization, elections, resettlement, and land mine removal.

Excludes interest accrued on loans to the Cahora Bassa hydropower project.

Excludes technical assistance.

Includes only concluded agreements.

In percent of exports of goods and nonfactor services.

Table 31.

Mozambique: Foreign Trade Indicators, 1991-95 1/

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Source: Staff estimates, based on data from the Bank of Mozambique and International Financial Statistics.

Values and prices in U.S. dollar terms.

Weighted average of unit values with constant weights according to the share of each item in the total of 1990.

Implicit volume derived from value and prices.

From international price indices (e.g., cost and prices of partner suppliers). Estimates of the Research Department, IMF.

Table 32.

Mozambique: Commodity Composition of Exports, 1991-95

(Value in million of U.S. dollars: volume in thousands of metric tons; and unit values in U.S. dollars per metric ton)

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Sources: Bank of Mozambique; Ministry of Commerce; National Planing Commision; and staff estimates.

Petroleum products, including bunkers.

Excludes coal.

Excludes prawns.

Figure 6.
Figure 6.

Mozambique: Selected Current Account Indicators, 1989-95

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

Sources: Bank of Mozambique; and staff estimates.1/ Net imports of goods and nonfactor services.

74. Merchandise imports fluctuated considerably in the 1991–95 period, mainly reflecting fluctuations in the availability of foreign aid flows. Imports declined by almost 5 percent in 1992, partially reflecting a deterioration in the terms of trade, or by 16 1/2 percent excluding drought–related imports financed with special grants. Imports grew by 9.2 percent a year on average during 1993–94, reflecting in part the beginning of donor–financed special programs for the demobilization of troops, resettlement and repatriation of refugees, and elections. Imports in 1995 declined by 23 percent to US$784 million, reflecting the end of the special programs and lower foreign aid flows. As a result, the ratio of imports to export of goods increased from 5.5 in 1991 to 6.8 in 1994 before declining to 4.6 in 1995. Concomitantly, the merchandise trade deficit widened from 51 1/2 percent of GDP in 1991 to 59 1/2 of GDP in 1994, before declining sharply in 1995 to 41 1/2 percent of GDP (US$615 million).

75. Service receipts growth averaged almost 12 percent in the 1991–95 period, bringing service receipts to US$301.5 million in 1995. The dynamism of this sector reflected mainly the effects of the substantial liberalization of the foreign exchange market, and in the case of tourism, the restoration of peace. Service expenditures grew by 10 1/2 percent a year on average during the 1991–95 period, partially reflecting the liberalization of the foreign exchange market and increased interest payments resulting from previous reschedulings.

76. The current account deficit before grants averaged 54 1/2 percent of GDP (204 percent of exports of goods and nonfactor services) in the 1991–95 period. The deficit rose during 1991–94 before declining to 46 percent of GDP in 1995 (166 percent of exports of goods and nonfactor services), mainly reflecting favorable developments in the merchandise trade account. Reflecting the trend in foreign aid flows, the current account deficit, after grants, widened from about 16 1/2 percent of GDP in 1991 to 23 percent of GDP in 1995.

77. The capital account experienced a sharp turnaround during the 1991–95 period, from a deficit of US$188 million (13 percent of GDP) to a surplus of US$61 million in 1995 (4 percent of GDP). This trend reflected increased foreign borrowing from multilateral organizations, particularly from the World Bank through the International Development Association (IDA).14 Private sector external borrowing, not guaranteed by the Government or the Central Bank, picked up in 1995 to US$48 million, from extremely low levels during the 1991–94 period. Increased private sector borrowing in 1995 was related mainly to the beginning of the rehabilitation of the Cahora Bassa hydropower energy lines. Scheduled amortization payments declined continuously from US$355 million in 1991 to US$268 million in 1995, reflecting in part increased concessions granted by Paris Club creditors in the 1990 and 1993 rescheduling agreements. Foreign direct investment growth averaged 37 1/2 percent a year in the 1991–95 period, albeit from a very low base at the beginning of the decade, reaching an estimated US$45 million in 1995.

78. In spite of the widening current account deficit after grants, the overall deficit declined from US$458 million (32 percent of GDP) in 1991 to US$288 million (19½ percent of GDP) in 1995, reflecting the turnaround in the capital account. The overall deficits were financed by debt relief from Paris Club and commercial creditors and by arrears relating to reschedulings being sought with non–Paris Club bilateral creditors. In addition, Mozambique strengthened its net foreign assets position from the equivalent of 2.8 months of imports of goods and nonfactor services in 1991 to the equivalent of 5.6 months of imports of goods and nonfactor services in 1995.

79. Regarding the direction of trade, the share of exports of goods to OECD countries averaged 62 percent (Tables 33 and 34). The share of exports to former centrally planned economies declined from 4.6 percent in 1991 to 1.1 percent in 1992, and has been zero since 1993. Exports are increasingly going to South Africa, Mozambique’s main trading partner, which increased its share from 16.5 percent in 1992 to 21.6 percent in 1995. Imports are increasingly coming from African countries, particularly South Africa which increased its share of Mozambique’s imports from 24.3 percent in 1991 to 37.6 percent in 1995. The share of imports from OECD countries remains high at 52.6 percent in 1995 but has been gradually declining since 1991 when it was almost 60 percent. Imports from former centrally planned economies declined at the same pace as Mozambican exports to these countries.

Table 33.

Mozambique: Exports by Country of Destination, 1991-95

(In percent of total exports)

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Sources: National Directorate of Statistics.
Table 34.

Mozambique: Imports by Country of Origin, 1991-95

(In percent of total imports)

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Sources: National Directorate of Statistics.

80. The metical has depreciated substantially in nominal terms since the start of the process of liberalization of the exchange rate in 1987 (Table 36 and Figure 7). However, since late 1995, the exchange rate has been relatively stable. In real effective terms, the metical depreciated from the late 1980s until mid-1992, and then fluctuated about a relatively constant level since then. Between late 1995 and mid-1996, the metical appreciated in real effective terms because of the depreciation of the rand and large price increase early in the year because of the floods. The spread between the parallel exchange rate and the average exchange rate for transactions with or among authorized foreign exchange dealers has fluctuated between 4 percent and 8 percent since December 1995.

Table 35.

Mozambique: External Debt by Lender, End - 1995

(In millions of U.S. dollars)

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Sources: Bank of Mozambique; and Fund staff estimates.

Includes arrears; it does not include loans to the Cahora Bassa hydropower project.

Includes the Fund.

Government, Government agencies, insured banks, and insured suppliers.

It does not include military debt. Ruble denominated debt is valued at the U.S. dollar rate specified in the contracts.

Table 36.

Mozambique: Exchange Rates, 1980-96

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Sources: Bank of Mozambique and International Financial Statistics.

Midpoint offical exchange rates, buying and selling rates +/-1 percent.

Per metical.

Figure 7.
Figure 7.

Mozambique: Exchange Rate Developments, July 1989 - June 1996

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

Sources: Bank of Mozambique

B. External Debt

81. At end–1995 Mozambique’s external debt (excluding loans related to the Cahora Bassa hydropower project in the early 1970’s and military debt to the Russian Federation) amounted to US$5.6 billion of which about US$1.2 billion was on arrears (Table 35).15 Of the stock of debt outstanding at end–1995, about 29 percent was owed to multilateral creditors, 35 percent to Paris Club creditors, and the remainder to non–Paris Club bilateral creditors.16 About 1 percent of the stock of debt was from the private sector. Of the debt outstanding to multilateral creditors, IDA accounted for 55 percent, the IMF accounted for 12½ percent, the African Development Fund accounted for 14 percent, and the remainder was distributed among other European, African, and Middle East development banks and funds. About 89 percent of the bilateral debt to Paris Club creditors was precut–off date debt,17 of which about 65 percent was debt that had been previously rescheduled on concessional terms. Of the stock of arrears at end–1995, about 60 percent was on debt owed to formerly centrally planned economies, 28 percent on debt owed to OPEC countries, and 7 1/2 percent on precut–off debt owed to Paris Club creditors.

82. In March 1993, Mozambique reached a rescheduling agreement with Paris Club creditors, under London terms (50 percent reduction in present value terms), covering maturities falling due in 1993 and, with a Fund arrangement in place, 1994. In the event, the consolidation period was extended to cover maturities falling due until June–1995. A total of US$492 million of maturities falling due in the 1993–June 1995 period was rescheduled in this agreement. As a result of the 1993 rescheduling with Paris Club creditors, average debt service due per year during 1993–95 declined from 139.2 percent of exports of goods and nonfactor services 86.5 percent per year. Debt service paid, however, averaged 30.8 percent of exports of goods and nonfactor services during the same period, reflecting accumulation of arrears to non Paris Club bilateral creditors (except to Brazil). Also, as the consolidation period of the 1993 Paris Club rescheduling was not extended to the second half of 1995, Mozambique built up arrears with Paris Club creditors on pre cut–off date debt amounting to US$84.6 million. Also, during the 1993–95 period Mozambique obtained debt reduction amounting to US$67 million from rescheduling agreements with Brazil.

C. Foreign Aid Flows

83. Foreign grants covered over half of all of Mozambique’s merchandise imports during the 1991–95 period, averaging US$480 million a year (more than 1/3 of GDP) during that period. The composition of foreign aid flows during the 1991–95 period varied according to the needs of the country. In 1992, about 21 percent of aid flows to Mozambique were drought–related inflows, particularly emergency food aid, which accounted for about 13 percent of aid flows. In 1993 and 1994, the share of aid flows used to finance special programs, including the demobilization of armed forces, resettlement and repatriation of refugees, removal of land mines, and elections, was 7 percent and 33 1/2 percent, respectively. Emergency food aid declined from almost 15 1/2 percent of aid flows in 1993 to less than 6 percent of aid flows in 1994.

84. In 1995, foreign aid flows declined by about 40 percent to US$339 million (23 percent of GDP). 18 Furthermore, the ratio of grants to merchandise imports declined to about 43 percent in 1995, reflecting larger private flows, including foreign direct investment. Most foreign aid was directed to finance investment projects (28 percent). Balance of payments support (untied aid) was also large with a share of 21 percent of total grants. Food aid, mostly emergency aid, was about 24½ percent of total aid flows. The remaining 26½ percent was directed to finance special programs, including demobilization, resettlement and repatriation, and removal of land mines. More than half of the aid flows received in 1995, excluding balance of payments support, was directed to finance project expenditures in the health sector (14 percent), agriculture (13½ percent), construction and water (12 percent), education (6 percent), and trade and tourism (5½ percent). About 70 percent of grants to Mozambique in 1995 were from bilateral donors, 24 percent from the United Nations, and the reminder from multilateral organizations—particularly the European Commission.

VII. Mozambique and the Cross–Border Initiative 19

A. The Cross–Border Initiative

85. The Cross–Border Initiative (CBI) represents a regional integration effort among countries in Eastern and Southern Africa. The initiative started in 1992 when countries in the PTA/S ADC/IOC region were invited to participate in a workshop in Mauritius. A second workshop in Harare, Zimbabwe, in December 1992, agreed on a Common Programme of Action (CPA), which set forth a set of core measures for the initiative. Those were subsequently spelled out in a Concept Paper, discussed at a meeting in Brussels on June 24, 1993. The Concept Paper was endorsed by 14 countries: Burundi, Kenya, Malawi, Rwanda, Tanzania, and Uganda in Eastern Africa; Comoros, Madagascar, Mauritius, and Seychelles in the Indian Ocean; and Namibia, Swaziland, Zambia, and Zimbabwe in Southern Africa. There are four co–sponsors to this initiative: the African Development Bank, the European Union, the International Monetary Fund, and the World Bank.

86. The CBI is a framework of jointly agreed policies, taken up voluntarily by the participating countries. The CBI is not meant to be a new institution; instead, it is a set of measures in four broad areas—trade, investment, exchange and payments, and institutional issues—aimed at developing a new integration approach based on the promotion of competition and efficiency in the participating countries. The framework emphasizes low trade protection vis–à–vis third parties. It is felt that such an approach would not only promote cross–border activity in the region, but also support integration into the world economy, within the WTO framework.

87. Neither Mozambique nor South Africa are participating in the CBI, although delegations of South Africa have attended some meetings as observer. This section estimates the possible fiscal revenue costs for Mozambique of participating in the initiative. Given the importance of South Africa as a trade partner for Mozambique, sensitivity analysis are performed to assess the effect on Mozambique fiscal revenues of the participation of South Africa in the initiative. While the CBI has several facets, this analysis focuses exclusively on the CBI efforts in the trade area.

B. Trade and the CBI

Overview

88. Despite past efforts to liberalize their trade regimes, PTA/COMESA countries still have relatively high trade barriers. Intra–COMESA import duty rates stand at nearly 40 percent of the regular import duty rates, thus implying a 60 percent preference, and there is room for efficiency gains from a liberalization of internal trade, and a move toward a common external tariff (CET). The use of non–tariff barriers is also widespread in the region, as import licensing, quantitative restrictions, and import bans are still employed to control imports in order to preserve foreign exchange or provide protection to domestic production. Removing these restrictions would produce positive welfare effects for the region as a whole, and help individual countries assert their comparative advantages.

89. The CBI calls for progress in both tariff and nontariff barriers both among participating countries and vis–à–vis the rest of the world. Regarding nontariff barriers, the CBI aims at the prompt elimination of all import licensing arrangements and similar nontariff barriers among participating countries. With regard to third–party trade, participating countries have agreed to eliminate import licenses and other nontariff barriers on a most–favored nation basis 20 Regarding tariff barriers, the initiative calls for the reciprocal elimination of tariff barriers among participating countries by 1998. As a minimum, participating countries should follow the schedule of phased tariff reduction of the PTA; under this schedule, tariffs among participating countries were to be reduced by 60 percent in October 1993, and then by an additional 10 percent in October 1994, October 1996, October 1998, and October 2000. The CBI also calls for the establishment of a common external tariff to be applied to non–CBI countries. The goal is a maximum external tariff of 15 percent, with only 3–4 categories.

Mozambique’s tariff system

90. Mozambique trade system has been significantly streamlined since the beginning of the structural adjustment programs in 1987. In particular, in 1991, the tariff structure was simplified from one with 34 rates to one with only 5 rates ranging from 5 to 35 percent. Moreover, in December 1993, the Government reduced tariffs on inputs to 5 percent; and adopted a 25 percent tariff ceiling on all products. Actual duties collected are, however, much lower than 25 percent owing to widespread exemptions. Decree 20/88, which authorizes the Minister of Finance to provide ad hoc exemptions has been abrogated on April 27, 1995 (Decree No. 16/95), but exemptions remain significant. In early 1996, the Government reduced the exemptions on goods imported into Mozambique by returning miners, and abrogated Decree 7/92, which provided for emergency exemptions originally intended for use in the context of the 1992 drought.

91. The Mozambican tariff system follows the CCCN classification. Ad valorem duties are based on c.i.f. value of imports, determined according to the Brussels definition of value. Most consumer goods are taxed in the range of 5–25 percent; raw materials and intermediate goods, 1–25 percent; most machinery, 5 percent; other capital goods, 5–25 percent; and unprocessed foodstuffs, 25 percent. Some rates are reduced by 10 percent under preference arrangements.

92. Imports exempted from customs duties are: (a) capital goods imported under the investment incentives law; (b) oil products; (c) imports associated with external grants and externally financed projects; (d) imports for diplomatic services, travelers’ baggage, works of art, imports with no commercial value, and other traditionally exempted imports; and (e) exemptions authorized by the Minister of Finance.

93. An additional 5 percent customs fee (emolumentos gerais aduaneiros) is levied on the c.i.f. value of all imports. Imports belonging to category (a) above are exempt. Other exemptions are granted only for emergency program and defense imports, subject to existing international agreements. The Minister of Finance may authorize exemptions or rate reductions. A reduction of 50 percent applies to imports of raw materials, and maize, rice, sugar, wheat, wheat flour, and edible oil.

94. A further reduction in the dispersion of tariff rates and in the levels themselves has been introduced in November 1996, but is not reflected in this analysis.

C. Possible Revenue Impact of the CBI

95. The liberalization process envisaged in the CBI will affect fiscal revenue, a concern for CBI participants. This section estimates the impact on Mozambique’s fiscal revenue of the elimination of intra–CBI tariffs and the adoption of a common external tariff.

Estimation 21

96. Ideally, the effects of tariff changes on revenue should be examined in a general equilibrium framework as it is likely to induce changes in relative prices and exchange rate, which would need to be accounted for in the analysis. Unfortunately, such an approach is not feasible in the case of Mozambique owing to data deficiencies. Instead, a partial equilibrium view is used to obtain a first approximation of the short–term impact of the elimination of customs duties on intra–CBI trade, as well as the effect of the adoption of a common external tariff (CET). The existing and CBI–proposed tariff structures are presented in Table 1.

Table 1.

Existing and CBI–Proposed Tariff Structures, 1995

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Sources: Data provided by the Mozambican authorities and CBI documents.

97. Given that Mozambique is an open economy, with a large import bill, and a tariff structure not very distant from what the CET will be, one might expect the revenue impact of the elimination of intra–CBI tariffs to be substantial relative to the impact of the adoption of the CET. Nevertheless, the opposite is found. Trading links between Mozambique and other countries that participate in the CBI (thus, excluding South Africa) are weak, representing in 1994 less than 9 percent of Mozambique’s imports and about 6 percent of exports.

98. In estimating the revenue loss from intra–CBI liberalization, the relevant question is whether duties on intra–CBI imports contribute significantly to total revenue—because this fraction of total revenue will be lost with internal liberalization. The revenue loss from internal liberalization is a function of both the level of tariff preference enjoyed by intra–CBI imports over imports from outside the region (p), as well as the share of intra–CBI imports in total imports (a). Specifically, the share of customs duties collected on intra–CBI imports in total customs duties collected (b) is written as:

b   =   ( 1 − p ) a / [ ( 1 − p )   a   +   ( 1 − a ) ] ( 1 )

99. The tariff preference enjoyed by intra–CBI imports over imports from outside the region (p) is 60 percent.22 The share of intra–CBI imports in total imports (a) is 8.6 percent. Therefore, b is just 3.6 percent of total customs duties collected. Since total customs duties were 2.8 percent of GDP in 1994, and assuming complete elimination intra–CBI tariffs, the effect of this measure on revenues would amount to a loss of about 0.6 percent of GDP.

100. The revenue impact of the introduction of the CET, Rim, is measured by the difference between revenues in the post–CET situation and the existing situation. The estimating equation for the revenue impact of the move toward the CET can be expressed as:

R i m / M ⁢ =   Σ i   C E T i   [ M i / M ]   − −   Σ i   [ M i / M ] t i   +   +   Σ i   e i [ ( 1 + C E T i / ( 1 + t i ) ) − 1 ]   C E T i [ M i / M ] ( 2 )

where M represents the value of imports, CET the common external tariff, t the external tariff in the pre–CET situation, and e the price elasticity of imports, with subscript i applying to good i.23 The expression has three terms, representing (i) the trade–weighted average tariffs in the context of the CET; minus (ii) the trade–weighted average tariffs before the introduction of the CET; and (iii) an elasticity effect, as the quantity imported will increase and may partly offset the revenue loss from the move toward the CET.24. The trade–weighted averages used in the estimation are corrected for the fact that 28 percent of all imports are exempt from tariffs. The difference between the pre–CBI and post–CBI external tariff rate represent the decline in revenues (7 percent of non–CBI imports) on account of the first two terms of equation (2).

101. The elasticity effect is +0.6 percent of non–CBI imports assuming that the price elasticity is –0.88 and +0.9 if the price elasticity is –1.40.25 These assumptions are representative of the likely import elasticities in Mozambique and provide results for the overall revenue impact of the CET that are reasonably similar (6.3 and 6.6 percent of non–CBI imports). Since CBI imports are 8.6 percent of total imports and total imports are 72.5 percent of GDP, the overall effect of the adoption of the CET tariff is likely to be smaller than 4.4 percent of GDP. Moreover, since the hypothetical trade weighted average duty is not actually collected, the revenue impact of introducing the CET should be adjusted by an estimated efficiency ratio of import duty collection, which compares the trade–weighted average tariff with the effective tariff rate:

[ c d / M ] / [ Σ i   M i t i / M ] ( 3 )

where cd stands for customs duties. In the case of Mozambique, the efficiency ratio is 21.3 percent.26 Correcting for the efficiency ratio, the reduction in customs duties on account of the CET would be less than 0.9 percent of GDP.27 Therefore, the total revenue cost of joining the CBI would be about 1.1 percent of GDP.

102. If, however, South Africa is included in the region as participant to this trade liberalization process, the impact for Mozambique changes substantially. In this case, imports from the region total approximately 42.8 percent of total imports.28 The revenue loss from elimination of tariffs vis–à–vis the CBI, including South Africa, would be 3.6 percent of GDP (about 0.8 percent of GDP after adjusting for the efficiency ratio). The loss from adopting the common CET in the case South Africa is part of the CBI would decline, however, to 2.7 percent of GDP (or 0.6 percent of GDP after adjusting for the efficiency ratio). The total revenue cost to Mozambique of joining the CBI in the case that South Africa also becomes a member would be 1.4 percent of GDP (after adjusting for the efficiency ratio).

Conclusions and qualifications

103. Joining the CBI will have a revenue cost to Mozambique, which will have to be judged against the benefits of the initiative in terms of trade creation and resource allocation. The revenue cost is likely to increase significantly if South Africa also joins the CBI. From the revenue perspective new revenue measures amounting to 1.1 to 1.4 percent of GDP would be needed to make joining the CBI a revenue neutral proposition.

104. The limited scope of this partial equilibrium analysis needs to be qualified. Evidence from recent research on tariff rates and revenue presents at least two immediate implications for the reform of tariff structures; namely, (i) the change in official rates of tariff especially at the high levels, is likely to have only a minor effect on revenue, as they tend to be compensated by changes in procedures for assessing import value, granting exemptions, and collecting the revenue, which are often part of the tariff reforms; and (ii) simulations that assume that tariff revenues fall one–for–one with rates overstate the impact of rate reductions on revenues by assuming constant collection rates.29 Also, the methodology used to estimate the revenue effect of joining the CBI assumes that the share of intra–CBI imports in total imports (a) will remain constant. This is unlikely to be true as imports from the CBI and from the rest of the world will be affected differently by the changes resulting from the elimination of the intra–CBI tariffs and the adoption of the CET.30

105. Considering a tariff as a tax, according to the Laffer Curve, there is a concave relation between the tax yield and the tax rate, so that tax revenue first increases, reaches a maximum, and then decreases. Above that maximum yield point, reducing the tax rate increases the tax yield instead of lowering it. Reducing tariff levels could actually boost revenue if the official tariff rate subject to adjustment is on the downward sloping portion of the curve. Research on Kenya, inter alia, pointed to a positive, nonlinear relation between official rates and effective rates of collection (estimated as the ratio of customs duties collected to the value of imports) with a different slope above and below a given level of the tariff. Above that given level, the slope declines, so that the collection performance at higher rates of customs duties is less than at lower rates.

106. Notwithstanding the above qualifications, it is reasonable to consider that in a short horizon only the tariff changes are fully implemented, even if one may expect that reducing tariffs lower incentives to smuggling and non–compliance. Over the medium term, tax and customs practices must be addressed, while a longer term response of the sectors of the economy to trade flows should be supported by actions toward improvements in the economic infrastructure and the provision of services. Key to unilateral benefits resulting from an enlarged market is the implementation of structural reforms. In fact, structural reforms play a crucial role for the reaping of benefits from an enlarged market and an increase in trade flows—a link to other CBI areas, notably investment and exchange systems.

VIII. Social Issues

A. Poverty

107. Mozambique has one of the lowest per capita income in the world (US$100 in 1995), its social indicators are worse than those of other Sub–Saharan countries, and 60 percent of its population is considered to live in absolute poverty. The poverty estimate is based on the number of households meeting one of two extreme poverty criteria employed by the UN: (i) daily caloric intake below two thirds of the minimum requirements; or (ii) prevalence of growth impairments in children.

108. About 80 percent of Mozambique’s poor households are rural or were displaced from rural areas during the war. About 60–70 percent of rural households fall below the poverty line. War increased the incidence of poverty by separating rural people from their livelihoods, or severely curtailing agricultural activity. The Government estimates that in 1992 some 4.5 million people were internally displaced or affected by war and drought. A further 1.8 million became refugees in neighboring countries, not including the estimated 1 million refugees in South Africa.

109. More than two thirds of the urban population, and 60 percent of Maputo’s population, are poor. Today, urban dwellers account for about 33 percent of Mozambique’s total population, compared to 13 percent in 1980, and therefore the number of poor urban people is substantially higher than before the war. Poverty is worse among larger households, and the presence of children increases dramatically the probability of a household being poor. According to the Household Expenditure Survey (IF) for Maputo, the population in the lowest decile of the distribution account for 2.5 percent of total expenditure, and 70 percent of this expenditure is on food. The population in the highest decile account for 34.7 percent of total expenditure. The main source of income of poor households is wages in small cities and self–employment in large cities.

110. Social indicators such as life expectancy, infant and under–five mortality and maternal mortality are substantially worse for Mozambique than the averages for Sub–Saharan countries and for the group of Least Developed Countries (see Basic Data table). The situation is worse in rural areas, where for example the infant and under–five mortality is 280 per thousand compared to Maputo’s 84 per thousand. Growth of over half of the children of Manica and Maputo provinces, and of about 30 percent of urban children is stunted. Many babies are born underweight as a result of malnutrition among their mothers. Adult literacy is very low (33 percent), and is even lower among women (16 percent) and in rural areas.

111. The determinants of poverty are very different in the rural and in the urban areas of the country. The war drove millions of rural people from their land. Access to markets and communications was disrupted, prospects for marketing export crops shrank, smallholders retreated into subsistence, and most of the non–farm rural economy collapsed. Lack of security limited the extent of cultivation and caused a drastic decline in investment.

112. In addition to the special problems of the war, Mozambique’s rural smallholders face fundamental challenges, most importantly low productivity in the context of fragile environments. A very high proportion of rural households are subsistence oriented and can be described as economically, socially and physically isolated. This isolation acts as a disincentive to the expansion of agricultural production, for rural households concentrate on the satisfaction of their basic needs rather than exploiting their comparative advantages, thus limiting their income earning possibilities, their consumption opportunities, their asset accumulation and their ability to adopt new technologies. The main consequence of this isolation is their vulnerability to unforseen economic circumstances and natural calamities.

113. Agriculture is the basis of the rural economy, and is primarily directed towards subsistence: only 29 percent of rural households sell their production. The most important crops are cashew, coconut and cotton, which are produced mainly in the northern provinces. Crop production involves mainly labor and land, with very little capital, and therefore the availability of labor is crucial for the level of agricultural production. However, household labor supply is limited by the structure of the household. The average household size has four or five members with a dependency rate of 110: for every 100 persons of working age there are 110 dependents. Hired labor is rare, and the importance of family labor resources implies that women household heads, around 25 percent of the total, are likely to be disadvantaged in their ability to generate agricultural income and therefore makes them more vulnerable. Migration to the cities reduces the family size and worsens the dependency ratio.

114. About 29 percent of rural households cultivate less than one hectare of land, though this proportion is much larger in the south (40 percent) than in the north (20 percent). This, together with the subsistence pattern of cultivation, implies that a large number of households suffer from seasonal food shortages, and their capacity to cope with these shortages is limited by their isolation, the shortage of adult labor and the lack of alternative income sources. The number of food insecure months can be as much as 5 in the South of the country, and 2.5 in the North. Regional variations in the availability of food are important. Households in the North have fewer opportunities for earning off–farm incomes, but have better soils and more favorable patterns. In contrast, the South suffers from greater variability in crop production, but this is compensated for by greater opportunities for earning off–farm incomes.

115. Hence, rural poverty is related to the low level of agricultural development because of the weak penetration of the market economy into rural areas. There is little stimulus to expand and diversify production and few opportunities to earn off–farm incomes, which implies a very low level of risk sharing.

116. The situation in the cities is different. One third of Mozambique’s population has been officially defined as urban. Seventy percent of the urban population is considered poor, of which three quarters are unable to meet the daily minimum requirements. The average household size in Maputo has seven members. Fifty percent of the extremely poor households have between 5 and 8 members, and in general the larger the size of the household the poorer the household is. The deterioration of urban living standards, apart from the effect of declining real wages, can be attributed largely to a crisis in employment following the economic decline of the 1980s. According to the Household Expenditure Survey, unemployment averages about 7.9 percent in the cities, and is higher among men (8.6 percent) than among women (6.9 percent). Underemployment is widespread among the poor, specially among women.

117. One of the most obvious reactions to poverty has been the growth of the informal sector, particularly evident in Maputo. In contrast to the residents of the provincial capitals who depend heavily on their access to the land for food and supplementary cash income, informal activities provide most of the income of the poor in Maputo. Small–scale trading, particularly the sale of food, accounts for most informal activity, especially among poor women. The urban poor typically lack the skills and capital to directly engage in the more profitable activities such as informal manufacturing. High rates of labor–force participation, including children, characterize poor urban households. The loss of jobs in the formal sector has increased the reliance of urban households on informal unemployment, resulting in downward pressure on average incomes. The informal sector is vigorous, and displays considerable skills of entrepreneurship. The growth of the trade in food between the “Green Zones” and Maputo and the city’s markets, an activity which is predominantly run by female micro entrepreneurs, is one example of the dynamism of the informal sector.

118. The government’s National Health Strategy has been articulated in an integrated sector program, designed and financed in coordination with donors and adopted in 1995. The program’s target is to increase health coverage from the current 40 percent of the population to 60 percent by 2000. The program concentrates on improving the quality and coverage of health services by rehabilitating and expanding the existing network of first–level health facilities and rural hospitals, rehabilitating provincial and central hospitals, ensuring stable provision of medical supplies, and maintaining health facilities. Special attention will be given to the health needs of women and children. The program will also develop human resources in the health sector by developing the capacity to better train health workers and by improving incentives for health sector personnel.

119. An integrated education sector program is being designed by the Government with the assistance of the World Bank; implementation is expected by end–1997. The program sets priorities for activities within the sector and estimates the level and distribution of expenditure needed to achieve and maintain the program objectives. The government’s highest priority is to greatly expand and improve the quality of primary education. Other priorities include improvements in the quality of secondary education, the access of girls to education, and strengthening the academic, administrative, and physical capacity of the Eduardo Mondlane University. Program implementation will focus on enhancing the quality of education by improving teachers’ training, reducing the student/teacher ratio, and expanding the use of teaching aids. With respect to secondary education, the emphasis will be on rehabilitation of facilities, curriculum improvements, and the establishment of professional examinations.

B. Safety Net Measures

120. In addition to encouraging a faster and poverty–reducing pattern of growth, especially through the development of small–holder agriculture, the Government’s poverty reduction strategy aims at developing human resources through the enhancement and expansion of basic health care and primary education, and improving the effectiveness of safety nets assisting the poorest and more vulnerable population groups. In this regard, social expenditure averaged 6.2 percent of GDP during 1991–95, reaching a peak of 7.3 percent in 1992 (Table 20). The bulk of the expenditure goes to education and health, which absorbed 3.1 percent of GDP, respectively, in 1995. Food subsidies and social subsidies accounted for 0.1 and 0.8 percent of GDP, respectively, in 1995.

121. Probably the most important measure was the setting up during 1990–91 of the Task Force for Support of the Vulnerable Population Segments (GAPVU), which in September 1991 launched a program of direct income assistance and food subsidies for poor households meeting the most stringent health and family criteria: (i) malnourishment among infants, (ii) underweight pregnant women, (iii) elderly people without means of subsistence, and (iv) seriously handicapped adults. This new scheme originally covered 2,000 households in Maputo, but by June 1996 it covered 90,000 households, the majority of them because of malnourished children and destitute elderly (Table 21).

122. The Social Fund for Medicine and Infant Food Supplement Program (SFM) subsidizes medicines for the poor, chronically ill, aged and unemployed and food supplements for malnourished children, nationwide. Its budget in 1994 was US$170 million, by far the biggest scheme among the social safety nets, and it is believed to have covered about 83 percent of the total value of medicines dispensed through the National Health System in recent years. The Fund is almost entirely donor funded, with occasional contributions from the central budget.

123. The School Lunch Program provides free meals to children in elementary schools. In 1993 200,740 children were covered, all in the province of Maputo, with financing of approximately US$2 million from the European Union.

124. The government also established the Poverty Alleviation Unit (PAU) in order to better integrate and prioritize poverty issues in the national planning process and to strengthen the database and analytical capacity for poverty analysis and policy making. To further improve the government’s capacity to address population, poverty, and social issues in an integrated manner, in 1996 the PAU was merged with the Population and Planning Unit (PPU) to form the Department of Population and Social Development. To implement the Poverty Alleviation Strategy in 1995, the Department will complete urban and rural poverty profiles in 1996; a national poverty assessment and Poverty Action Plan are expected to be completed in 1997. The Action Plan will include a reform of existing social safety nets to improve their targeting and cost effectiveness. Currently the social safety nets include a School Lunch Program, a Social Fund for Medicine and Infant Food Supplement Program (SFM), and the GAPVU cash transfer program. The replacement of emergency food aid distribution in rural areas by a rural Disaster Safety Net and/or a rural nutrition safety net will also be considered under the Poverty Action Plan.

125. In order to support the recovery of the economy from natural disasters, the disaster safety net would have as its priority ensuring that rural households during emergency periods are able to maintain their asset base and working capital so that they can quickly resume production. The proposal contemplates three major components. The first is the expansion of therapeutic feeding through nutrition clinics; this program already exists in the hospitals of many district capitals and is to be extended to provide true national coverage. The second relates to labor intensive public works, and consists of the use of labor intensive methods to maintain and rehabilitate rural roads, giving priority to female heads of households and to the most destitute households. The third is the distribution of seeds before the next harvest, coordinated by the Ministry of Agriculture, in order to assist in the recovery of production. The seeds will be distributed through labor intensive schemes at subsidized prices.

126. An important issue, specially in the cities, is the retraining of unemployed individuals who have unwanted or redundant skills. With this objective, a joint UNDP/ILO project started recently to train demobilized soldiers and to equip them with basic tool kits. This initiative may be extended to other target groups. Despite the worsening labor crisis, no coordinated national employment strategy exists so far, although the creation of the National Institute for Employment and Vocational Training (INEFP) may change the situation.

APPENDIX I Revenue Impact of the Introduction of the CET

Let revenue impact be = Rim = R’–R, where R stands for revenue and primes are used for the post–CET situation, as opposed to the pre–CET or existing situation

  • R = ΣiMiti,

  • R = ΣiMi’CETi, and

  • M value of imports in local currency

  • t external tariff in pre-CET situation

  • CET common external tariff

  • subscript i applies to product i

  • Mi = QiPiE

  • Q quantity imported

  • P price in foreign currency

  • E local currency value of a unit of foreign currency

Further,

  • Pdi’ = (1+CETi)/(1+ti),

with

  • Pd domestic price,

  • ei = [(Qi’–Qi)/Qi]/[(Pdi’–Pdi)], with

  • e price elasticity of imports.

From the two above equations, we can solve for Qi’ so as to express R’ in terms of M and prices:

  • Qi’Qi*{1+ei[(1+CETi)/(1+ti]}

For the post–CET situation,

  • Mi’ = Qi’PiE

Therefore, using the above equation for Qi’ and the equation on Mi, we have Mi’ in terms of M and prices:

  • Mi’ = Qi { 1+ei [(1+CETi)/(1+ti)–1]} PiE

  • Mi’ = Mi { 1+ei [(1+CETi)/(1+ti)–1]}

We can now express R’ and thus Rim as:

  • R’ = Σi CETi Mi { 1+ei [(1+CETi)/(1+ti)-1] }

  • Rim = Σi CETi Mi { 1+ei [(1+CETi)/(1+ti)-1] } – ΣiMiti

Or, rewriting,

  • Rim = Σi CETi Mi –ΣiMiti+Σi ei[(1+CETi)/(1+ti)–1] CETiMi

and

R IM / M  = Σ i  CET i   [ M i / M ]  - −   Σ i   [ M i / M ]  t i  + +   Σ i  e i   [ ( 1 + C E T i ) / ( 1 + t i ) − 1 ]  CET i [ M i / M ]

APPENDIX II Mozambique: Summary of Major Taxes as at August 31, 1996 1/

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Sources: Information provided by the Ministry of Finance.

Other taxes remain in effect, but their importance decreased sharply owing to the nationalization of land and urban property. They are: tax on rental income (contribuição predial), levied annually on the actual or presumed rental value of urban property; the gift and inheritance tax (imposto sobre as sucessões e doações). formerly chargeable to the beneficiary; and a tax on transfers of real property (sisa). The first of these taxes is provisionally regulated by Title IV of the Code approved by Legislative Act 2774 of September 16, 1967; the other two come essentially under Decree 31408 of July 19, 1914.

Some minor duties have been maintained in the customs legislation, despite the tariff reform (Decree 14 of June 19, 1991). In addition to the stamp tax, the following also apply: (a) to imports, revenue stamp tax on the consumption tax and broadcasting fee; (b) to exports, the value-added tax; and (c) to both imports and exports, the warehousing fee and the maritime trade tax (the latter established by the General Maritime Taxes Regulations (Legislative Act 627 of February 8, 1939), based on weight. Although not included in the current customs legislation, two very minor taxes established by the aforementioned Regulations are also collected by Customs: the lighthouse tax (imposto de farolagem) and the tonnage tax (imposto de tonelagem).
1

The ERP was renamed the Economic and Social Rehabilitation Program (ESRP) in 1989 to reflect an explicit emphasis on the social impact of adjustment.

2

Structural adjustment and enhanced structural adjustment facilities.

3

This section is based on official national accounts data. However, there are serious deficiencies in the official data reflecting inadequate coverage and methodological problems. GDP is probably underestimated and private investment overestimated, the latter because of the inclusion of expenditures that are properly current expenditures.

4

Defined as imports of goods and nonfactor services minus exports of goods and nonfactor services.

5

Gross domestic savings is defined as the difference between GDP and total consumption; it is equal to gross investment plus the current account of the balance of payments minus net factor income from abroad and net unrequited transfers.

6

Equal to the current account of the balance of payments.

7

The CNSP is an interministerial agency chaired by the Ministry of Finance.

8

Petroleum product prices are uniform in Maputo, Beira, Quelimane, Nampula, Nacala and Pemba; in other places, prices are set taking into account a transportation differential and retail margins.

9

The gap between the minimum agricultural wages and the other two categories reached 50 percent in 1995 and 1996.

10

The GINI coefficient is an indicator of the degree of equality in a given distribution of income or salaries. When salaries are equally distributed among recipients, its value is zero In case of extreme inequality the GINI coefficient will be equal to unity.

11

This compares with shares of 21.8 percent and 8.9 percent respectively at end–1994.

12

Credit to the economy is mentioned in conjunction with net other assets (NOA) because of an earlier tendency to expand the latter to circumvent ceilings on the former. Also, definition changes complicate the separate discussion of the original and revised program targets for NOA.

13

However, it further exacerbated BCM’s liquidity problems, as government and other deposits were moved from the BCM to the new BM branch.

14

Borrowing from bilateral creditors remained at a low level, reflecting a shift in external assistance from credits to grants by most bilateral creditors.

15

No estimates are available from the Mozambican authorities either on military debt owed to the Russian Federation or on debt of Cahora Bassa to Portuguese commercial banks.

16

As of end–1995, the Russian Federation was the largest single creditor with a stock of debt of about US$790 million. Half of this debt is denominated in rubles and, for reporting purposes, is evaluated at the Gosbank rate (about Rub 0.6 per dollar). These data have not yet been reconciled with creditor records.

17

The cut–off date is February 1, 1984.

18

Foreign aid flows as recorded in Mozambique’s balance of payments statistics excluding technical assistance.

19

This section was based on a note prepared by Ms. Claudia Ribeiro de Castro, a doctoral student at Columbia University and a summer intern in the Southern Africa II Division in the Summer of 1995. She would like to thank Dawn Rehm and Kori Udovicki for helpful discussions.

20

A short negative list may be maintained for reasons of health and security.

21

The estimation methodology used is based on Bakoup, F., A. Bessaha, and L. Enrico, “Regional Integration in Eastern and Southern Africa: The Cross Border Initiative and Its Fiscal Implications,” IMF, Working Paper 95/23, February 1995 and uses data for 1994.

22

Kenya, Budget Speech for the Fiscal Year 1994/95 (delivered on June 16,1994 by Hon. W. Musalia Mudavadi, Minister of Finance)

23

See Appendix.

24

Trade diversion effects, namely more expensive imports from a partner in the integration arrangement substituting for cheaper imports from an outside country, are minimized on account of protection against outside countries being lowered after the integration arrangement is formed.

25

Attempts to estimate the import price elasticity for Mozambique did not yield robust results. The range of price elasticities assumed in this note is based on Arize, A. and R. Afifi, “A Simultaneous Model Demand for Imports in Twenty–Seven African Countries: Evidence of Structural Change,” The Indian Economic Journal, Vol. 33, No. 2 (1986), pp. 93–105.

26

This ratio is calculated on the assumption that the trade–weighted average is 18 percent. In fact, the actual trade–weighted average is probably smaller as the tariff applying to some goods is bound to be below the maximum rate. Therefore, the efficiency ratio reported above is likely to be an underestimation of its true value.

27

Assuming a price elasticity of –0.88. Please note that the efficiency ratio is also relevant for the calculation of the revenue loss from removing intra–CBI duties. Therefore, the revenue loss from removing intra–CBI duties is in fact 0.1 percent of GDP, not 0.6 percent of GDP as stated above.

28

Data availability is limited. Possible sources are licensing data from the Ministry of Commerce, which is likely to be underestimated; or data from the Direction of Trade Statistics (DOTS), which is put together with information from Mozambique’s partner countries. The data used in these calculations adds licensing data for South Africa to the DOTS data, which does not include them—a procedure which approximates the “official” import figures reported by the Mozambican authorities and used in the RED. However, these numbers—and the results of the analysis—should be interpreted with caution.

29

Pritchett, L. H., and G. Sethi, “Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts,” The World Bank Economic Review. Vol. 8, No.l (1993).

30

However, the effect of the change in a on the results is not expected to be large.

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Cover IMF Staff Country Reports
Mozambique: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 142
Publisher:
International Monetary Fund
ISBN:
9781451827033
ISSN:
1934-7685
Pages:
106
DOI:
https://doi.org/10.5089/9781451827033.002
  • Figure 1.
    View in gallery
    Figure 1.

    Mozambique: Selected National Accounts Indicators, 1987-95

  • Figure 2.
    View in gallery
    Figure 2.

    Mozambique: Gross Output and Sectoral Production, 1989-95

    (1989=100)

  • Figure 3.
    View in gallery
    Figure 3.

    Mozambique: Consumer Prices, 1987 - August 1996

  • Figure 4.
    View in gallery
    Figure 4.

    Mozambique: Composition of Budgetary Revenues and Expenditures, 1995

  • Figure 5.
    View in gallery
    Figure 5.

    Mozambique: Rediscount Rate, 1987 - August 1996

  • Figure 6.
    View in gallery
    Figure 6.

    Mozambique: Selected Current Account Indicators, 1989-95

  • Figure 7.
    View in gallery
    Figure 7.

    Mozambique: Exchange Rate Developments, July 1989 - June 1996

Figure 1.

Mozambique: Selected National Accounts Indicators, 1987-95
Figure 2.

Mozambique: Gross Output and Sectoral Production, 1989-95

(1989=100)
Figure 3.

Mozambique: Consumer Prices, 1987 - August 1996
Figure 4.

Mozambique: Composition of Budgetary Revenues and Expenditures, 1995
Figure 5.

Mozambique: Rediscount Rate, 1987 - August 1996
Figure 6.

Mozambique: Selected Current Account Indicators, 1989-95
Figure 7.

Mozambique: Exchange Rate Developments, July 1989 - June 1996