Republic of Mozambique
Poverty Reduction Strategy Paper

The Poverty Reduction Strategy Papers (PRSPs) on the Republic of Mozambique review the country’s macroeconomic, structural, and social policies in support of growth and poverty reduction, and external financing needs and major sources of financing. It is essential to guarantee that mechanisms of democratization are present within the political parties and to develop participative democracy. Monitoring and evaluation is also a means of keeping abreast of not only the government, but also organizations in civil society, the Mozambican legislature, and the cooperation partners.

Abstract

The Poverty Reduction Strategy Papers (PRSPs) on the Republic of Mozambique review the country’s macroeconomic, structural, and social policies in support of growth and poverty reduction, and external financing needs and major sources of financing. It is essential to guarantee that mechanisms of democratization are present within the political parties and to develop participative democracy. Monitoring and evaluation is also a means of keeping abreast of not only the government, but also organizations in civil society, the Mozambican legislature, and the cooperation partners.

I. Introduction, and Relationship Between PARPA and Other Planning Documents

1. The Government of Mozambique’s Action Plan for the Reduction of Absolute Poverty for 2006-09 (PARPA II) is intended to reduce the incidence of poverty from 54 percent in 2003 to 45 percent in 2009.

2. This document is a successor to PARPA I (Government of Mozambique, 2001). It shares the same priorities in the areas of human capital development through education and health, improved governance, development of basic infrastructures and agriculture, rural development, and better macroeconomic and financial management.

3. This PARPA differs from the previous one in that its priorities include greater integration of the national economy and an increase in productivity. In particular, it focuses attention on district-based development, creation of an environment favorable to growth of the nation’s productive sector, improvement of the financial system, measures to help small and medium-size companies to flourish in the formal sector, and the development of both the internal revenue collection system and the methods of allocating budgeted funds.

4. This plan links its specific priorities with allocations of funds for the five-year period.

5. Although PARPA II calls for an increase in internal revenues for 2006-09 in real terms, the Mozambican government expects to continue to rely on the contribution of its cooperation partners to finance about 49 percent of the State Budget every year during this period.

6. Owing to the extent of poverty in Mozambique, reducing it challenges both the State and the elements of civil society, and the cooperation partners, to dedicate their efforts. It is vital that there be clear dividing lines between the functions of each of these parties so that coordination and alignment among all of them can be more effective and efficient. It is the responsibility of the Government of Mozambique to coordinate these activities.

7. A summary of the principal vision for PARPA II is presented in Chapter IV (Principal Vision, Objectives, and Essential Actions).

8. PARPA II centers attention on ways to raise the low standard of living of the least favored population groups whose current situation corresponds to “absolute poverty.”

9. During the process of planning, executing, monitoring, evaluating and adjusting PARPA II, strategies, programs, and sectoral and cross-sectional programs and plans were also used as basic documents. Regional, African and international agreements, including the Millennium Development Goals (MDG), New Partnership for the Development of Africa (NEPAD) and the Southern African Development Community (SADC), were respected.

10. Because of the importance that the Government of Mozambique attaches to participation by civil society and appropriate use of the contributions from the cooperation partners in the achievement of the objectives defined here, the drafting of PARPA II took into account the opinions of both groups.

11. PARPA is flexible, and is adjusted and updated annually using the Medium-Term Fiscal Framework, the Economic and Social Plan, and the State Budget, which are tools used to implement the Government’s Five-Year Plan. What remains constant throughout its life are the two general objectives (Chapter IV, section 2).

12. During the subsequent five years, 2010-2014, specific key components of PARPA will be incorporated into the Government’s Five-Year Plan.

13. The combination of the two processes and instruments has the advantage of rationalizing the public planning exercise. This will enable efforts to be channeled toward implementation of the government’s plan from the very beginning of its term of office.

14. The new government will easily be able to align the priorities, debated throughout 2009, with the objectives stated in the Electoral Manifesto.

15. Over the long term, the objective on which Mozambican society has reached a consensus is the improvement of the standard of living and welfare of its citizens. Long-term objectives also include the following: (i) a balanced economic and social development; (ii) reduction of absolute poverty; (iii) consolidation of the peace, national unity, and democracy; (iv) widespread application of the rules of justice; (v) improvements in education and health; (vi) encouragement of work, honesty, zeal, and enthusiasm; (vii) the guarantee of individual freedoms and social harmony; (viii) the imposition of laws against criminal acts; the guarantee of sovereignty, and (ix) the guarantee of sovereignty and the strengthening of international cooperation.

16. The government took these objectives into consideration, in both letter and spirit, when it defined its Five-Year Plan for 2005-09 and in the subsequent preparation of this PARPA II.

17. PARPA II is presented with reference to three pillars: governance, human capital, and economic development. The pillars approach enables us to focus attention on the functions of social organization via the State, the development of individual abilities, and the creation of wealth to improve the well-being of the citizens. It also makes it possible to examine the connections among the three functions that are necessary if the central objectives are to be achieved.

18. The governance pillar seeks to make the apparatus of the State a means of sparking the development of human capital and the economy. The government will give special attention to improving the quality of policy analysis and design, in order to obtain fully the expected results of their implementation. Officials will be guided by the principles and laws of a government ruled by law, thus ensuring transparency and accountability and combating the diversion and improper use of public funds and resources. Also included is active enforcement of the laws against criminal acts and corruption.

19. The human capital pillar provides continuity to the plans for developing work-related technical and scientific skills, good health and hygiene, and access to basic resources—especially food and water—and reducing the incidence of diseases that affect the most vulnerable population groups, focusing particularly on the battle against HIV-Aids, malaria, and tuberculosis. A special part of the resources in the state budget will be used to finance classic social services that cover a huge proportion of the population, including the poorest.

20. The economic development pillar concentrates on conditions basic to the pursuit of productive activity, such as improvement in infrastructures that promote the creation of wealth and ensure the availability of natural resources, a reduction in bureaucratic obstacles, and the enactment of legislation that safeguards citizen rights and encourages gains in productivity, and innovation. It will also give priority to intersectoral connections in order to ensure higher productivity in agriculture and related sectors. Additional priorities are the development of the banking and financial systems so that they may fulfill their duties in retention of savings and active financing of production, particularly production by small and medium-sized companies.

21. The element common to the three pillars is the building of the Mozambican nation, consolidating national unity, developing each citizen’s human potential, creating a functioning institutional system, and increasing the ability to create national wealth.

22. A fundamental condition for success in the formation of this Nation is ensuring that investments are made in basic infrastructures and maintenance thereof. We need to foster efficient communications from north to south of our territory and between rural and urban areas for people, goods, and information. Improving these communications will facilitate the integration of farmers and the other rural and urban residents.

23. The multisectoral coordination among the different State institutions, organizations in civil society, the business community, and other development partners is the touchstone that will ensure the harmonious and multifaceted development of this country.

24. The integrated and balanced development of this nation is an imperative that is a determining factor and has multifaceted historical, political, social, anthropological—and even economic—implications. The priorities associated with each pillar will necessarily reflect this concept.

25. Since national development is a priority, PARPA II is also mindful of the need for Mozambique to gradually and progressively integrate itself into the community of neighboring countries, the rest of Africa, and the world.

26. After recovering production capacity in agriculture, construction, and services, the trend in economic growth may begin to depend increasingly on productivity gains and the ability to create, retain, and productively use domestic savings. These two factors present an enormous challenge for the coming years.

27. Growth in productivity is another element that connects the three pillars, and it is something that all three are focused on. The governance pillar will help achieve this objective if the quality of services, analyses, government policies, and monitoring improves, along with government’s ability to make adjustments. This role of the State needs to be buttressed by political quality and quality leadership, as well as the technical quality of its staff. The benefits to the economy will be felt in terms of a reduction in bureaucracy and an increase in quality, strategic investment in infrastructures, as well as incentives for growth of the private sector. Investments in education and health and sanitation services should be oriented so as to mold citizens into a more effective production force that enjoys a higher standard of living.

28. Chapter II, which follows, explains the methodology used in preparing PARPA II. Chapter III reports on the trend in the indicators of absolute poverty. Chapter IV presents the strategic vision, the objectives and the priority actions. Chapter V discusses the basic macroeconomic and fiscal scenario. The absolute poverty reduction scenarios are presented in Chapter VI. The principal objectives and actions on cross-sectional matters are discussed in Chapter VII, and the objectives and actions are addressed in detail, by pillar, in Chapter VIII. Chapter IX explains the factors that will determine the success of the implementation of PARPA II. Chapter X reports on monitoring and evaluation procedures, and the Annex presents the summarized matrix of the indicators to be used in monitoring and evaluation.

[Chart, page 5 of the original translation of text w/o arrows and shading]

Figure 1:
Figure 1:

The Public Planning system: Relationships Among Instruments

Citation: IMF Staff Country Reports 2007, 037; 10.5089/9781451827293.002.A001

II. PARPA Review Methodology

29. During the preparatory phase from January to March 2005, the Government of Mozambique arrived at a common approach to the process of reviewing PARPA with the other government institutions, civil society, and international partners (MPD 2005a).

30. The notion of a strategy of consensus that guided Agenda 2025 was revived, as were aspects of the process used in the preparation of that document. In this context, the following support structures were created: (i) thematic groups and working groups (Table 1) – observing the structure of the Joint Review (PAP, 2005); (ii) the Technical Secretariat, and (iii) the national and provincial Poverty Observatories (MPD 2005b).

Table 1:

PARPA II Working Groups, by Subject

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Note: This table includes the original working groups. The housing and social action groups were formed later. The private sector subgroup included in its discussion matters related to other areas that were not arranged in specific groups (including tourism, fisheries, mines, industry). Source: Government of Mozambique 2005.

31. The working groups were composed of technical personnel from the government, civil society, and international partners. The government and civil society met without the international partners for several sessions to acquaint themselves with the principal issues and to exchange opinions. Representatives of civil society were in regular contact with the Technical Secretariat. The international partners entered the process later. The idea of including the partners in a second phase helped to some degree to ensure the “appropriation” of the process.

32. In the first phase, the process of drafting PARPA II, for 2006-09, was begun. That process culminated with the 3rd Poverty Observatory, held on August 4, 2005.

33. Note that the national Poverty Observatories are participative forums that include the government, civil society, and the international partners. Their purpose is to follow the progress of PARPA actions and the level of PARPA performance

34. During the 3rd Poverty Observatory, the major lines of the PARPA II were defined and the initial decisions by the working groups were presented. These reports were compiled by subject matter. The medium term action plan, structured by pillars, was defined this way: (i) governance, (ii) human capital, and (iii) economic development.

35. In addition, the provinces held their own Provincial Poverty Observatories in order to receive contributions to PARPA II from local civil society and the cooperation partners.

36. During the second phase, after the 3rd Poverty Observatory, the working groups and thematic groups were assigned to produce the documents and materials needed to facilitate the task of drafting the preliminary version of PARPA II. These basic documents were finalized early in October 2005. The working groups continued their work on the matrices designed by area, following the orientation that came out of the 3rd Poverty Observatory. Then one matrix was developed to be used to plan and calculate the costs of the different activities (Operational Matrix), and another matrix was designed with indicators and goals for the proposed activities, to be used to monitor PARPA II (the Strategic Matrix).

37. The purpose of the 4th Poverty Observatory, held in November 23, 2005, was to study a preliminary version of PARPA II, based on contributions from the various components of the process: (i) reports from the working groups; (ii) contributions from civil society and the international partners; and (iii) reports from the national and provincial Poverty Observatories.

38. Following the 4th Poverty Observatory, the PARPA II was completed and sent to the Council of Ministers and the legislature.

39. The next chapter examines the evolution of poverty in Mozambique during the PARPA I period (2001-2005).

III. Absolute Poverty - Evolution

(a) The Definition of Poverty

40. Reduction of absolute poverty has been one of the key objectives in the governance programs in various countries. However, the debate on the definition of the concept “poverty” continues. For purposes of policy decisions, poverty was initially considered as the lack of income—money or negotiable goods—necessary to satisfy basic needs. Because this monetarist definition did not cover all the manifestations of poverty, the definition was broadened over time to cover such aspects as a lack of access to education, health care, water, and sanitation, etc. At present, the definition of poverty has also come to include aspects such as isolation, exclusion from society, powerlessness, vulnerability, and others. Box No. 1 presents alternative definitions of poverty that attempt to cover the principal manifestations of poverty, including the definition used for PARPA II.

What is poverty?

PARPA I definition: “the inability of individuals to ensure for themselves and their dependents a set of minimum conditions necessary for survival and well-being, according to the society’s standards.”*

PARPA II definition: “the impossibility, owing to inability and/or lack of opportunity for individuals, families, and communities to have access to the minimum basic conditions, according to the society’s basic standards’”

Other definitions:

––”lack of income necessary to satisfy basic nutritional and non-nutritional requirements” (Absolute poverty, in terms of income.)

–– “lack of sufficient income to satisfy the essential nutritional and non-nutritional needs, according to the average income in the country.” (Relative poverty)

––”lack of basic human capabilities, such as illiteracy, poor nutrition, reduced life expectancy, poor maternal health, and incidence of preventable disease. This definition is related to indirect measurement factors, such as access to goods, services, and infrastructures necessary to achieve basic human capacities—sanitation, potable water, education, communications, energy, etc.” (Human Poverty)

Note:* Definition adopted on the basis of the Avaliações da Pobreza (Poverty Appraisal) studies of 1996-97 and 2002-03.

41. Because poverty is a multidimensional phenomenon, there is no single indicator that can capture all its manifestations. Therefore, to measure the evolution of poverty, we must use several indicators that attempt to capture the principal forms of poverty through multiple approaches.

(b) Methods of Measuring Poverty

42. There are two main methods of monitoring and evaluating poverty: quantitative studies, and qualitative studies. Quantitative studies are based on the averages for a population selected by using large representative samples. For example, the Survey of Family Units (Inquérito aos Agregados Familiares - IAF) 2002-03 interviewed 8,700 family units and the Demographic and Health Survey (Inquérito Demográfico e de Saúde -IDS) 2003 interviewed 11,500 women between the ages of 15 and 45. The quantitative studies are intended to furnish objective data on the population’s standard of living.

43. However, there are problems in obtaining certain kinds of data from these quantitative studies. For example, the qualitative perceptions that people have of the nature and causes of poverty are hard to capture. Qualitative and participative studies can yield information that is difficult to capture using conventional surveys. The disadvantage is that qualitative studies are often based on small, unrepresentative samples that hamper a generalization as to the results.

44. Under normal conditions, the two methods would complement each other pluralistically. Analyses of poverty in Mozambique have not yet achieved this objective--see the section on Monitoring and Evaluation for future plans in this regard. However, a considerable number of quantitative and qualitative studies have been made since 2000, and those studies supplied a wealth of information. The following sections of this chapter discuss quantitative indicators of poverty, the general results of qualitative studies, and selective cross-cutting issues.

(c) Qualitative Indicators

45. There are many quantitative indicators, such as illiteracy, mortality rates, percentage of the population lacking access to potable water, and income. One important measure is based on consumption per family unit. The goal of reducing poverty from 54 percent in 2003 to 45 percent in 2009, mentioned in the first paragraph of this document, refers to a consumption-based indicator. Studies by the Ministry of Planning and Finance (MPF) et al. (1998 and 2004) on the status of poverty in this country used consumption per capita—i.e., total consumption by the family unit, divided by the number of its members—as the basic measure of individual well-being. The consumption measure encompasses the total value of items consumed by the family unit, whether they were purchased or produced by the family unit itself, including transfers and the appreciation in value of durable goods owned by the family unit.

46. Given the importance placed on indicators of consumption, it is worth looking more closely at them. However, a principal point of this section of the document is that consumption-based indicators have not been and should not be the only standards to be used to measure poverty. Other indicators will be presented in later sections.

Consumption-based indicators

47. The reason why consumption at the family unit level is used instead of an income-based indicator, for example, is that:

  • Consumption is the most appropriate indicator or measure of achieved well-being, while income is a measuring tool for potential well-being, since the income may or may not be spent on consumption; and

  • Consumption is the most accurate and most stable indicator of well-being, since it fluctuates less over time.

48. In consumption-based assessments of poverty, the basic minimum conditions were identified on the basis of an absolute poverty line measured in monetary terms that permits the family unit to obtain a basket of goods corresponding to a basic standard of living. Each poverty line was constructed as the sum of the nutritional poverty line established by nutritional standards of approximately 2,150 calories per person per day, plus a modest portion for non-food expenditures, determined on the basis of the portion of the budget spent on non-foods by families whose total consumption is approximately equal to the food-related poverty line. The poverty analysis in 2002-03 was done to facilitate a comparison of the results from that period with the results from 1996-97.

49. The headcount index of poverty measures the portion of a population that has been defined as “poor,” i.e., the people whose consumption falls below the poverty lined as defined. Two important additional measures of poverty are calculated using the poverty lines: the poverty gap index and the squared poverty gap index. The poverty gap indices are more sensitive, particularly to changes in standards of living among the poor. For example, if a poor person increases his consumption but still stands below the poverty line, we can say that poverty has been reduced because the person has become less poor. The headcount index of poverty does not capture this reduction in poverty, but the other indices will capture it.

50. The evolution of the headcount and poverty gap indices is shown in Table 2. The results indicate that during the two periods examined here, a rapid reduction occurred in these indicators. The headcount index fell from 69.4 percent in 1996-97 to 54.1 percent in 2002-03, a decline of approximately 15.3 percent. We should remember that the objective of PARPA I was to reduce poverty to about 60 percent by 2005, which means that this goal was exceeded by 5 percent. The poverty gap index also declined sharply, from 29.3 percent in 1996-97 to 20.5 percent in 2002-03, a reduction of almost a third. These results mean that (i) the percentage of the population below the poverty line has fallen, and (ii) average consumption by those who remain below the poverty line rose between those two periods.

Table 2:

Trend in the Incidence of Poverty, and Confidence Interval (2002-03)

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Source: MPF et al. 2004; and Simler and Arndt 2005.

51. Although high levels of poverty reduction have been achieved, the situation is still critical in this country because 10 million Mozambicans still live in absolute poverty. Chart 1 shows how those 10 million are distributed among provinces (MPF et al. 2004).. The chart indicates that every province has at least 500,000 poor people. It also shows clearly the influence of Nampula and Zambézia provinces in both total population and the impoverished segment.

52. In terms of region, note that poverty declined more in the rural areas than in urban zones—by 16 percent and 10.5 percent, respectively). Zambézia and Tete provinces experienced reductions in poverty greater than 22 percent, while Sofala province reported a reduction of more than 50 percent, taking it from the poorest of the provinces to the one with the lowest poverty. Poverty reductions were found in almost all the provinces of central and northern Mozambique, except for Cabo Delgado, where poverty increased. In the south of the country, the scenario nearly the inverse. Poverty increased in two provinces there—Maputo province and Maputo city. In Inhambane, a marginal reduction—from 82.6 percent to 80.7 percent—was seen, making this the country’s poorest province. Explanations of the trend in poverty, by province, were presented in the Poverty Appraisal Study of 2002-03 (MPF et al. 2004).

Chart 1:

Population and Poverty, by Province (2002-03)

[Graph on page 11 of the original]

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Source: Prepared on the basis of IAF 2002-03 (INE 2003).

53. Table 2 shows the evolution of poverty and the confidence intervals in the estimates of poverty incidence for 2002-03. Those confidence intervals exist because estimates are made on a random sample of the population, not total population. We should point out that the results in the provinces have larger confidence intervals in comparison with the national results and the results per zone. Actually, the confidence intervals should be even bigger because of errors not associated with the sample. For example, if there were mistakes in communication between the survey worker and the respondent, these mistakes would enlarge the confidence intervals from the levels shown in Table 2.

54. Inasmuch as poverty is a multidimensional phenomenon, and because of the uncertainty associated with any indicator––especially at the provincial level––it is important to introduce, at this point, other ways of measuring poverty, and to make progress in the future in using multidimensional quantitative analyses.

Health-based indicators

55. There has also been a favorable trend in indicators based on health, but they are still high. For example, the mortality rate among children under the age of five fell from 207 per 1000 live births in 1997 to 153 in 2003, driven by a decline in infant mortality from 149 to 101. This indicator showed significant improvement between 1997 and 2003; however, the mortality rate among children under the age of five in 2003 is still close to the average for less developed countries, which stood at 160 in 2001.

56. Table 3 shows estimates of the prevalence of malnutrition in children, by survey, indicator, and age group. Some efforts were made to make the available data suitable for comparison. Following those adjustments, results indicate that the prevalence of malnutrition among children, according to three frequently-used indicators, fell between 1996/97 and 2003. However, in comparison with the gains recorded in consumption, those improvements in the prevalence of malnutrition among children seem minor and are sometimes not statistically significant.

Table 3:

Estimates of prevalence of malnutrition, by survey*

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Note:* Percentage of the target population who fall below the line that marks the minimum standard.Source: Simler and Ibraimo (2005)

57. The reasons behind the relatively weak performance of the indicators of the prevalence of malnutrition in periods of rapid economic growth are not well understood. Here are some of the contributing factors: constraints associated with public health conditions such as the quality of sanitation, access to potable water, and the prevalence of diseases such as malaria. Furthermore, nutrition depends not only on the pattern of consumption by the family unit, but also on conditions in the community as a whole.

58. The figures for the headcount index of poverty were based on the potential capability of a family unit to achieve average consumption and did not take into consideration the distribution of food among members of the same family unit. Children between the ages of 6 and 24 months are the most vulnerable to malnutrition, because that is when they start eating solid foods. Improvements in the knowledge and practice of methods of proper feeding for children in that age bracket are important, but do not automatically accompany gains in consumption by the family unit. This situation calls attention to the need to make mothers the central focus of food policy and programs.

Other Indicators

59. Tables 4a and 4b summarize the trend in 35 indicators at the provincial level. A plus sign (+) indicates an improvement, and a minus sign (-) indicates deterioration. According to Table 4b, the country experienced an 88.4 percent improvement in the indicators of well-being that were considered. Greater weight was given to access to private goods and services, such as access to modern lighting, a source of potable water and improved sanitation systems, better housing, and possession of durable goods. The provinces of Tete and Maputo are the ones that exhibited the highest percentage of improvement, mainly because of the favorable developments in the areas of health and access to private and public goods and services, such as improved roads, markets, and means of communication.

Table 4a:

Summary of the change in several indicators between 1996/97 and 2002/2003

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refers to rural areas, + indicates an improvement, and - indicates a deterioration.

[Translator Note] EP1 is first-level Primary Education, i.e., grades 1 to 5.

Table 4b:

Summary of the change in several indicators between 1996/97 and 2002/2003

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refers to rural areas, + indicates an improvement, and - indicates a deterioration.

[Translator note:] Last two columns are cut off in the original document. Figures here are those that appeared in the November version of this document.

Source: Ibraimo, 2005

60. The City of Maputo is a special case because it improved in only 61.6 percent of the indicators considered. Looking at the ranking of provinces with respect to the highest level of access to services and infrastructure, we conclude that the city has always ranked first in comparison to the rest of the country—the information about “level” is not explicit in Table 4b. This modest improvement may reflect the ever-increasing pressures on the city, mainly due to its territorial expansion, accompanied by an increase in demographic load. The increase in mortality among infants and children and chronic malnutrition merits special attention.

61. The results are heterogeneous. No province succeeded in improving all 35 indicators, and no indicator worsened in all provinces. However, in general, the quantitative indicators of consumption, health, and other aspects exhibited a tendency to improve between 1996-97 and 2002-03.

(d) The Causes of Poverty and of the Decline in the Quantitative Measures Shown Here

62. In 1992, Mozambique was known as “the world’s poorest country.” This undesirable situation was the result of a complicated historical heritage that included a period of colonization that put little emphasis on human capital, a failed (in economic terms) socialist experience, and a vicious civil war that lasted more than a decade. This toxic situation was aggravated by the drought of 1991-92, one of the 20th century’s most severe. It would be hard to underestimate the severity of the poverty that existed at that time.

63. Both the economy and society have been profoundly transformed since 1992. The factors identified in PARPA I as contributing to an improved economic and social situation were (among others), peace and the postwar economic recovery, macroeconomic stability, and the transition to a market economy. The poverty reduction strategy in PARPA I concentrated on the principal determinants of economic growth. In making this strategy operational, PARPA I established a vision of the areas where basic actions could be taken to improve the people’s welfare. These areas included peace and social stability, education, health, agriculture and rural development, basic infrastructures, good governance, and macroeconomic and financial management.

64. Between 2001 and 2005, remarkable achievements were realized in all the areas of action listed above. It would be extremely difficult, if not impossible, to formally attribute the reductions in poverty to the contents of the various specific areas of basic action. This is largely because of the interdependencies among the action areas in fostering economic growth and reducing poverty. To cite just one example, it is hard to build schools without building roads. However, the analyses of poverty show, frequently and robustly, that education is a fundamental determinant of well-being. Furthermore, in an economy where 80 percent of the active population (the percentage is higher among the poor active population) works in farming, it is hard to conceive of large-scale reductions in poverty unless there is growth in the agricultural sector.

65. Despite the gains made, and the fact that more than a decade has passed, the historical heritage mentioned above remains the fundamental cause of the high levels of absolute poverty in this country. A shift from a situation where the great majority of the population lives in absolute poverty, to a situation in which where the great majority is not poor requires decades, even when the rates of reduction in poverty are rapid, by international standards. The analyses of poverty indicate that elements of the population who have a high probability of being poor include uneducated people, family units with high rates of dependency, and family units headed by women. (Maximiano 2005; Fox, Van Den Broeck, and Bardasi 2005).

66. The perceptions of the causes of poverty, based on the qualitative research, are discussed in the following section.

(e) Qualitative Studies

67. Because it was recognized that to evaluate poverty, we need to have information that was gathered by using qualitative methods, the first survey of this kind was conducted in 1995 and 1996, covering 18 districts in ten Mozambican provinces. This study was done by the Center for Population Studies at Eduardo Mondlane University (CEP-UEM), working with the former Ministry of Planning and Finance (MPF) and other government and non-governmental organizations. In 2001, another series of Participative Poverty Appraisals (Diagnósticos Participativos da Pobreza) was organized by the MPF with assistance from the UEM and UNDP. This survey covered 21 districts in 7 provinces in this country, namely Cabo Delgado, Nampula, Zambézia, Sofala, Tete, Inhambane, and Maputo Province. As a follow-up to these exercises and in order to consolidate their practice, a pilot study was conducted in 2003 in Sofala with assistance from UNICEF and in coordination with the Studies Center of the Department of Geography at the Pedagogical University of Beira. The study covered three districts, on the basis of three communities per district.

68. Lastly, in 2005, the fourth qualitative study was conducted, in coordination with the School of Letters and Social Sciences of Eduardo Mondlane University, in the provinces of Sofala and Inhambane, covering a total of eight districts. The selection of these two provinces had to do with the results obtained in the most recent National Poverty Appraisal, in which it was found that Sofala had cut poverty by more than 50 percent while there was very little change in Inhambane Province, which makes it now Mozambique’s poorest province. In comparing these qualitative studies of poverty, we do not see big differences in terms of the results obtained. The main results of these studies are presented below.

69. During the 1995-96 assessment, widespread reference was made to the war as a determining factor underlying the living conditions of those who were the poorest people at that time. “Ignorance” and unfavorable weather were also mentioned. Looking at the 1995-96 and the 2001 and 2003 appraisals, we see a slight change in the causes of poverty. In the latter two cases, the war was not often mentioned as a determining factor in poverty. Nine years had passed since the end of the civil war in Mozambique. The absence of social assistance by the government and other institutions; lack of employment opportunities, i.e., working for other people; limited access to financing; marketing problems; and disability—physical and mental—keeping people from working are mentioned as determinants of poverty in the period 2001-03. Migration forced by the war—”displaced persons”—and the closing of factories were also pointed out as causes of poverty. Theological or fatalistic issues were mentioned too—it was said that some people are simply born to be rich and others to be poor.

70. Another point that deserves attention is that the most remote communities believe that those who live closer to the administrative offices get more government assistance and have better access to services (education, health, and markets) while those who live at a great distance have been completely abandoned. The results of the most recent qualitative study on poverty resemble those of 2001 and 2003, where the following were specifically mentioned as causes of poverty:

  • (a) Environmental issues, such as droughts and floods;

  • (b) Human issues, such as a lack of jobs, problems with access roads, exclusion based on partisan leanings, and laziness; and

  • (c) Aspects related to government protection of animals were also mentioned, such as the ban on killing animals that destroy crops because those fields are in a game preserve.

71. Definitions of priority problems to be solved to reduce poverty vary, depending on the respondent’s age, gender, economic status and position in the power structure. In decreasing order of importance, the poorest rank their priorities as: transportation, roads, prices, marketing, access to land and water, and installation of motor-driven mills. These are activities that, after all, can make their farming efforts more profitable, improve their terms of exchange or ability to participate in the market, and reduce the need for manual labor, always a limiting factor.

72. In the 2001 diagnoses, the need for access to basic social services was emphasized, particularly the shortage of health posts near where people live, lack of transportation for the sick (ambulances), and insufficient personnel. Problems of corruption, lack of a potable water supply—especially the poor maintenance of the existing infrastructures (such as pumps)—were also reported during this diagnosis. In the 2005 appraisal, in addition to the issues mentioned in both 2001 and 2003, priorities cited included assistance to widows and orphans, an increase in police presence, direct assistance to the poor, and agricultural processing plants.

73. Since most of the Participative Poverty Appraisals/Participative Rural Diagnoses were made before certain social programs were implemented, when we ask who in a community is poor, most people claim to be poor so that they can be included in those socioeconomic programs. The difficulty of identifying the different strata in a community made it hard to design a profile of those who might be considered poor, or not poor. This distinction is very useful in designing an action plan.

74. With respect to perception of poverty, responses varied with the survey site. Some factors that were mentioned as associated with being poor were: material goods, sources of income, and civil relationships/status.

75. According to the communities covered by the 2005 appraisal, in terms of wealth, the population can be divided into three groups—the poor, the rich, and those in the middle. In terms of frequency of survey responses, the poor are those who cannot work owing to physical disability, age, illness, or marital status–widowhood. On other occasions, poverty is linked to the fact that someone works hard, but ultimately earns little due to various factors such as unfavorable weather, or having small farms in areas where the soil is not fertile. Poverty is also related to superstition, and family poverty seen as a kind of predestination. However, physical poverty was also mentioned as the lack of essential goods, sufficient food, clothing, or lack of any alternative source of income.

76. During these four studies mentioned above, the aspects most often mentioned as characterizing the social status of poverty or wealth, in the order as presented, were such things as possession of cattle; employment, a bicycle, or a car; possession of clothing and its quality; having a house and the condition thereof; having money, access to credit, and saleable goods; ownership of a shop or market stall; access to foods in quality and quantity. Looking at poverty within communities instead of from the individual standpoint, we concluded that the symptoms and causes of poverty are a lack of basic infrastructures such as roads, markets, and transportation, poor crop yields, and the absence of assistance institutions.

(f) The Volatility of Poverty

77. The dominant impression we get from the available quantitative data is that living conditions for this country’s population have been improving since the mid-1990s. This is observable in several indicators, including poverty indices based on consumption, education, health, infant mortality, and access to services. However, progress has not been uniform; it varies markedly, depending on region and kind of indicator. The question we might ask is why this lack of uniformity, both in regional terms and among indicator categories? For indicators related to government services, differences in the distribution of funds and the efficiency with which they are put to use explains some of the variation in performance.

78. The underlying regional variations in economic potential (which depend to a considerable extent on the availability of infrastructures) may also pay a dominant role. Therefore, the evidence also points to a high degree of between-year variation in many of the indicators used. In other words, if we were omniscient and could observe the exact value of the series of the important living condition indicators over time, we would probably observe a substantial variation in them during that lengthy period.

79. There are many forces behind these variations. Particularly in rural areas, the enormous variability in living conditions reflects the significant year-to-year fluctuations that are typical of farming on the dry, non-irrigated lands that are the primary source of employment for most Mozambicans (Table 5). The effects of meteorological changes are exacerbated by both internal and external economic factors such as exchange rates and the prices of oil, cotton, cashew nuts, and corn. For example, factors that probably contribute to the apparent poor performance in poverty reduction as measured by consumption indicators in southern Mozambique include: low rainfall in the South during the crop year prior to the survey; the effects of major floods in that same zone two years prior to the survey; and the substantial depreciation of the metical against the South African rand during the survey period.

Table 5:

Participation in the Occupied Labor Force, by Sector and Gender

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Note:* Only those who are occupied. The rate of participation was calculated as a proportion of the occupied population with respect to the population of active age. If the unemployed are included, total participation would be about 3 percentage points higher.

PIA is the population of active age, i.e., those age 15 to 60.

Source: Prepared on the basis of IAF 2002-03 (INE 2003).

80. In short, the trend in poverty (or in living conditions), whatever measuring stick is used, very probably would not be monotonous. Even when very strong positive trends are present, living conditions can easily deteriorate during a short time period, particularly when we are looking at limited geographic areas or a certain indicator. It is also important to remember that humans are not omniscient and that the availability of quantitative data sometimes results in inaccurate indicators of living conditions. Panel or longitudinal data are intended, essentially, to understand the interaction between chronic and transitory poverty. The 2005 Agricultural Survey Project (Trabalho de Inquérito Agricola - TIA) was the first large-scale panel study to be conducted in Mozambique and will furnish important information in this area, as will the data from subsequent panels.

81. Certainly, large fluctuations in living standards pose much more than a measurement challenge. Such fluctuations increase family unit vulnerability, inasmuch as families that manage to generate [wealth] and escape poverty run the risk of becoming poor again. Therefore, the important objective is not only to achieve a rising trend in the living conditions of the poor, but also to boost the ability of those families to withstand shocks and maintain an adequate and relatively stable standard of living.

82. We can supplement the dominant impression of the improvement in living conditions with the following observations:

  • (a) Poverty persists throughout the country and is severe. Regardless of the measuring tool used, every region will be found to have a significant number of poor people.

  • (b) The influence of the population of Zambézia and Nampula indicates that the performance of those two provinces is crucial to any nationwide indicator. Poor performance in those two provinces will very probably result in poorly-performing national indicators. (Regional disparities are discussed in greater detail below).

  • (c) The underlying variation in the indicators, combined with limits on accuracy in the measurements of these indicators and the time lag in availability of information, indicate that care must be taken in distributing resources, particularly in doing so on the basis of a single indicator.

(g) Some Concerns

HIV/AIDS

83. One of the issues of greatest concern for the Mozambican economy is the high rate of HIV/AIDS prevalence. The latest estimates indicate that 16 percent of the population aged 15-49 are serum-positive, i.e., 1.5 million Mozambican s are living with HIV/AIDS. The estimates by sex for 2005 indicate that 21.9 percent of women age 20-34 are infected, compared with 7.2 percent of men in the same age group. In addition, 8.5 percent of girls age 15-19 are infected, compared with 2.8 percent of the boys. This situation shows that the current role of HIV/AIDS and its consequences fall mainly on the women, owing not only to their level of infection, but also because of their social responsibilities toward other family members. Beyond the human implications of this pandemic, this disease will have a negative impact on the economy through three different channels:

  • (a) reduction in population growth and accumulation of human capital;

  • (b) reduction in the accumulation of physical capital, and

  • (c) reduction in labor force productivity.

84. Estimates indicate that HIV/AIDS could reduce per capita economic growth by 0.3 percent to 1.0 percent per annum. Poverty rates will fall more slowly because of less vigorous economic growth, reduction in the accumulation of human capital, and an increase in dependency rates within families (Arndt 2003).

85. We should note that the effects of AIDS are already beginning to be felt. Chart 2 shows that, at the national level, total deaths due to AIDS since the disease first appeared are the same as the projected number of deaths for 2006-2010 (INE et al. 2004).

Chart 2:

Adult Deaths Due to AIDS

[Graph, page 24 of the original]

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Source: INE et al. 2004

HIV/AIDS and Orphans

86. The 800,000 deaths forecast to occur between 2004 and 2010 as a result of Aids and related diseases will significantly increase the number of orphans. These children encounter serious problems in access to education. Orphans living in foster families are especially discriminated against in terms of access to family resources (Nhate et al. 2005). Inadequate access to resources, especially education-related resources, limits their ability to emerge from poverty.

Gender Inequality

87. Gender inequality represents an obstacle to this country’s economic growth. In general, family units where the woman is discriminated against tend to be poorer. Improving the education of women increases the efficiency of family unit decisions regarding production, consumption, and savings.

88. Analyses of the incidence of poverty according to sex of head of family were made, as were estimates of the distribution of the labor force by sex and income level. These estimates show that families headed by women have a higher incidence of poverty—62.5 percent compared with 51.9 percent for families headed by men. The determinants of poverty indicate that high rates of poverty among families headed by women are related to low educational levels, widowhood and high rates of dependency, and incomes too low to meet family needs.

89. With respect to labor force indicators, three indicators related to poverty merit separate mention:

  • (a) The female population is concentrated in rural areas and is employed in the subsistence sector;

  • (b) Levels of schooling among women are very low compared with those among men; and

  • (c) Women are heavily represented in the labor force, despite the burden of domestic tasks.

90. Tables 5 and 6 clearly illustrate these facts. Women account for about 55 percent of the labor force, if we use headcount as the basis. That female labor force is heavily concentrated in agriculture: 90 percent of economically active women work in farming, compared with two thirds of the men. In other words, for every 100 men working in agriculture, there are 164 women in that same field. And so participation by women in other sectors is minor in comparison with the role of men. For example, women represent 3, 4 and 25 percent of the labor force in the fields of construction, transportation, and government, respectively.

Table 6:

Occupied Labor Force by Highest Level of Education Completed, and by Gender

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Note:* This group also includes technical education and teacher training courses.Source: Prepared on the basis of IAF 2002-03 (INE 2003).

91. It is interesting to note at the bottom of Table 5 that the extent of participation in the labor force is slightly higher for women than for men (82 percent compared with 79 percent). This is due to the fact that more men than women between the ages of 15 and 20 are attending school, despite the important gains made in the education of women in recent years.

92. The cumulative effects of a history of relatively low levels of schooling for girls are clearly shown in Table 6, where almost 96 percent of the women who work did not attend school through, or advance past, EP1. This compared with 85 percent of the men. Crossing Tables 5 and 6 with each other shows that 88 percent of the female labor force is unskilled, and is concentrated in agriculture.

93. In this regard, the link between gender and poverty is one of the leading concerns in the context of the reduction of absolute poverty. However, that very link raises questions about the best focus to adopt in order to reduce poverty among women. On the one hand, it is clear that achieving higher levels of schooling is fundamental and will also make it easier for women to enter non-farm sectors that, frequently, would earn her higher pay. However, in the next several years, the majority of them will continue to be unskilled and associated with the agricultural sector. Therefore, we must simultaneously identify mechanism by which they can boost their income to such an extent they [missing word] the poverty situation and improve their quality of life. Two initiatives are fundamental here:

  • (a) Development and dissemination of improved farming technologies, particularly for food crops that involve an important contingent of female labor; and

  • (b) Provision of goods and services that can alleviate the burden of domestic tasks on women (such as reducing the distance they must travel to get water and health services, and rural electrification) and that would increase the time they have available to spend in other productive activities.

Regional Disparities and Inequality

94. One of the questions raised about PARPA II was the need to address regional disparities in poverty and well-being. Both the consumption-based poverty measuring stick and the methods of measuring well-being that are not related to income vary considerably among the provinces, and between rural and urban areas. The 2002-03 IAF showed a significant reduction in poverty in northern and central Mozambique, but no change in the South, which makes this the poorest region in terms of consumption-based indicators (MPF et al. 2004). This situation is partly attributable to bad weather in the South during this period (first the floods, then the drought), together with volatility in the exchange rates that has an impact because of the strong connections between Mozambique’s economy and that of its neighbors.

95. On the other hand, poverty measurement tools unrelated to income exhibit a contrary panorama. In general, public services are much more available in the South than in other parts of this country, and this difference is shown by several indicators. Literacy and educational levels are higher in the South, especially when compared with the provinces of the North. This is the result of discrepancies in educational opportunities among regions and the tendency for better-educated people to migrate to areas where employment opportunities are more attractive. People in the northern and central provinces also have poor access to health care services and higher rates of infant and maternal mortality, high levels of malnutrition, and low rates of vaccination. Transportation and market services in central and northern parts of the country are unreliable, which restricts the benefits to be gained from a favorable agricultural environment. While difficulties in access to markets slow the flow of production and contribute to keeping prices low for the buyer, those difficulties reduce farmers’ earnings and discourage production.

96. There is some evidence that these regional disparities are narrowing both in terms of income-related poverty and on the basis of other indicators. Ibraimo (2005) shows that in recent years there has been considerable convergence—i.e., reduction in regional disparities—in many of the indicators of well-being that are not related to income. Similarly, James et al. (2005) shows that the inequalities in consumption that exist in Mozambique occur more often within each region than between regions, and that inequality between regions has declined somewhat since 1997. However, despite this convergence, regional disequilibria are still characteristic of poverty in Mozambique and still deserve specific attention in PARPA II.

97. As for the distribution of consumption among the wealthiest and poorest social strata, the trend indicated by the Gini coefficient, which was 0.40 in 1997 and 0.42 in 2003, is statistically insignificant (Table 7). Most provinces experienced a small increase in the inequality estimate, although this was not significant except in Maputo City. In this province, the poor do not benefit from economic growth as much as the rich do. Because inequality in this country has not increased significantly in the past five years, we can say that the base for economic growth has expanded. Although historically a trend toward an increase in inequality is not unusual to several countries that are experiencing a phase of rapid growth, this indicator should continue to be monitored because a worsening of inequality may sow the seeds for destabilization.

Table 7:

Changes in Inequality Over Time

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Note:* The Gini and GE(1) (Generalized Entropy ratio) sum up the dispersion of a distribution. “Zero” is interpreted as an absence of inequality.Source: James et al. 2005

IV. Vision, Objectives, and Essential Actions

(a) The Vision

98. The objective of constructing a prosperous Mozambican Nation is still valid. It guides and motivates the State to promote an increase in productivity.

99. It is important to maintain high average annual rates of economic growth similar to those of previous years by adopting a comprehensive and inclusive model in order to improve living conditions, the well-being of our citizens, and to reduce poverty. This section describes the basic conditions for achieving these objectives, and the general lines of PARPA II.

100. Consolidation of peace and democracy, social stability, public safety, and the guarantee of individual freedoms are basic conditions for the growth of this economy and a reduction in absolute poverty.

101. The State will continue to invest in providing public goods and services in order to reduce poverty via transfers of resources (redistribution), similar to what happened during PARPA I, but giving relatively more attention (compared with PARPA I) to local, endogenous economic development, while keeping in mind this country’s integration into the African continent and the rest of the world.

102. The level of poverty prevailing in this country in the early 1990s, the success in achieving peace, and the transition to a democratic regime and market economy created an opportunity for Mozambique to receive financing in the form of donations and concessional credit from the international community. The government made an explicit commitment to adopt a strategy to reduce poverty during 2001-05. This strategy involved giving priority to the development of human capital and good governance practices, ensuring macroeconomic stability, investing in basic infrastructures, and contributing to the development of agriculture and the rural economy.

103. PARPA II 2006-09 maintains the objective of reducing poverty by redistributing resources, an approach that benefits the poorest and least favored population groups. However, PARPA II must become more consistent and sustainable if it is to raise the living standard and increase the well-being of Mozambicans in such a way that their own efforts, together with national savings, acquire a preponderant role.

104. Consequently, PARPA II lays out the additional objectives of improving the monitoring of economic development, playing a more active role in regulating private sector activity and the mechanisms of competition, and continuing to allow room for public-private partnerships in the creation of a favorable environment for business. Using macro- and microeconomic connections, the State will make it easier for the private sector to fulfill its function of energizing the real and financial sectors of the economy, not only for the big companies, but primarily for small and medium-size units in the rural areas that are engaged in agricultural production, agroindustry, and other economic sectors.

105. The State will gradually increase its tax revenues as a proportion of GDP until 2009, reaching 15 percent in that year. This objective should be achieved without increasing the tax burden on the formal sector, by expanding the tax base, curbing tax evasion, and reducing tax incentives.

106. Institutions in civil society, having participated in the poverty reduction actions during PARPA I, continue to be stakeholders and important partners for PARPA II. External aid and cooperation with the government’s cooperation partners are still important in the battle against absolute poverty.

107. The strategy of promoting economic growth and reducing poverty is organized around three pillars: governance, human capital, and economic development, and integrating the cross-cutting topics.

108. Following are the government’s priorities and central objectives, by pillar.

(b) Priorities

109. The government’s Five-Year Plan for 2005-09 defined some key general objectives that are presented here in detail and arranged by pillar. The respective central priorities are also identified.

i. General

Objectives
  • Reduction in the levels of absolute poverty; and

  • Promotion of rapid, yet sustainable and comprehensive, economic growth.

Priorities
  • Carry out policies and use instruments to promote an average annual real growth in national per capita income;

  • Maintain close coordination with the international community in order to permit continuation of the flows of aid to this country, particularly to the State Budget;

  • Ensure redistribution of income to the population, particularly the poorest strata, by providing social services and performing other relevant and classical State functions;

  • Continue to monitor the trend in poverty levels; and

  • Improve the monitoring of trends in the economy, including productivity, using better and more appropriate statistical indicators, and employing them at the opportune time.

ii. Governance

Objectives
  • Consolidation of national unity, peace, justice, and democracy;

  • Confrontation of corruption, excessive bureaucracy, and crime;

  • Strengthening sovereignty and international cooperation; and

  • The harmonious development of this country.

Priorities
  • Ensure the separation of powers: executive, legislative, and judicial;

  • Keep open the channels and the spirit of communications among the different political forces;

  • Rationalize the functions of the government bodies in order to meet planned objectives, improve intersectoral coordination, and avoid redundancy;

  • Decentralize government functions down to the district level, thus entailing budgetary repercussions, in order to facilitate local development;

  • Review the salary and incentives structure and adopt the practice of outsourcing—contract outside the staffing pattern—in order to ensure that positions that require advance technical skills are filled by Mozambicans, and that creation of these positions reflects established priority policies.

  • Guarantee protection of property rights; rationalize and regulate land use. Work with civil society and the private sector to find ways to expeditiously solve contract disputes in the business world, while respecting the laws that are in force;

  • Prepare a plan for dealing with vulnerability to natural disasters, or events of human origin such as droughts, floods, plagues, epidemics (e.g. earthquakes [sic]), increases in petroleum prices, drastic deterioration in the terms of trade, and sharp fluctuations in exchange rates;

  • Ensure the effectiveness of government inspection authorities and the agencies that audit performance in the financial and property areas;

  • Combat crime;

  • Integrate into activity programs and plans the key international commitments relating to integration into the continental sub-region and the international community, keeping in mind that the well-being of Mozambican producers and consumers must not be allowed to deteriorate as a result of these agreements; and

  • Work to see that investments and State Budget resources are distributed nationwide in a balanced fashion.

iii. Human Capital

Objectives
  • Expand and improve the levels of education;

  • Improve and expand access to health care;

  • Improve and expand access to potable water and adequate sanitation;

  • Promote and consolidate self-esteem in the minds of the citizens; and

  • Increase awareness of the importance of a culture that values work, enthusiasm, honesty, and accountability; and

  • Help young Mozambicans to realize their potential and creative and entrepreneurial abilities, and express their voluntarist spirit.

Priorities
  • Expand access to education and improve its efficiency, paying particular attention to women and girls, children with special educational needs, orphans, and children from rural areas;

  • Encourage the personnel who emerge from the various levels of the educational system to respond to the needs of the business community and the market, making use of science and appropriate modern technology;

  • Carry out scientific activity and technological innovation and application, taking into consideration its practical application and usefulness in production;

  • Expand the coverage of health care services;

  • Reduce mortality among mothers and infants;

  • Curb the incidence of HIV/AIDS; reduce deaths from malaria and tuberculosis;

  • Improve the extent of coverage of water supply and sanitation services;

  • Help create equality of opportunity among women and men, without discrimination—either positive or negative—giving preference to harmony between social progress and local tradition;

  • Include in the educational curriculum, beginning at the elementary school level, topics on morals, the culture of work, and individual responsibility;

  • Promote the strengthening of the youth association movement as a strategy for organizing and increasing participation by young people in society;

  • Develop and consolidate social networks of support for the least favored citizens, orphans, the elderly, the disabled, the mutilated, and the chronically ill;

  • Integrate the system that supports citizens who are malnourished and suffering from hunger crises, by developing the food production system; and

  • Ensure maintenance of environmental equilibrium throughout Mozambique, including areas where new projects, regardless of their nature, are being carried out.

iv. Economic Development

Objectives
  • Rural development;

  • Foster the development of the national business community; and

  • Create an environment favorable to investment.

Priorities
  • Stimulate the structural transformation of agriculture, which involves increasing that sector’s productivity and integrating it into the rural sector, the rest of the economy, and competition on world markets;

  • Make the north-south corridor a focal point for national development, featuring multisectoral and territorial links, in order to meet overall objectives and the objectives of the three pillars;

  • Draft a national policy for sustainable energy and continue to invest in electrification projects nationwide, especially in rural areas;

  • Help achieve and maintain macroeconomic stability through competent management of public finance and of the operations of the Bank of Mozambique;

  • Gradually increase tax revenues as a proportion of GDP until 2009, to attain a level of 15 percent in that year. Revisit the current rates in the basic laws on the VAT, IRPC (Corporate Income Tax) and IRPS (Individual Income Tax), without exacerbating the tax burden;

  • Ensure that the State acts in a timely fashion to honor its commitment to pay for services and goods purchased on the market;

  • Define a strategy for guiding, systematizing, and orderly handling the flows of foreign aid and external credit into the public sector, and find sustainable ways to manage the public debt;

  • Encourage an increase in national savings and a sustainable increase in credit and micro-credit to the economy, in real terms;

  • Define an international trade policy and a strategy for regional economic integration in Southern Africa and in the principal world markets that is favorable, in aggregate terms, to Mozambican producers and consumers;

  • Promote expansion of the agroindustrial system, labor-intensive manufacturing, and export-oriented local industries, particularly small and medium-scale units and those that make a high relative contribution to national income and job creation;

  • Guarantee the sustainable use of natural resources and implement transparent mechanisms for the management and rational exploitation of those resources;

  • Promote, regulate, and monitor the development of tourism, ensuring that this sector makes a sustainable net contribution to the State Budget over the medium and long term;

  • Implement a program for construction of excavated reservoirs; rainwater collection systems; and small, medium, and large dams in order to satisfy the needs for water for human consumption, livestock, irrigation, fisheries, industry, tourism, electricity production—among other uses—to mitigate, in a planned manner, the negative effects of droughts and floods, with a view to ensuring sustainable management of the country’s water resources.

V. Basic Macroeconomic and Fiscal Scenario

(a) Medium-Term Budgetary Programming

110. The central purpose of this chapter is to present a scenario that could serve as basis for the macroeconomic and fiscal framework of PARPA II by quantifying its strategy and identifying opportunity options/costs. The scenario gives forecasts for 2005-09, and 2014.

111. The basic scenario presents an optimistic goal. It is much more than a restrictive and conservative vision, and is intended to spur reforms. The scenario presents a macroeconomic and fiscal picture that is consistent with the scope of the PARPA II goals.

112. The scenario covers the real, external, fiscal, and monetary sectors, since they are all interconnected. In the fiscal sector, the 2005 figures come from the report on Execution of the State Budget, while the State Budget is the source of the 2006 figures. It should be noted that the 2005 State Budget Execution Report represents a preliminary estimate, since information on the execution of investment expenditure is still incomplete.

The Real Sector

113. The basic scenario projects economic rates of growth averaging 7 percent until 2009, and 6.5 percent in 2010-14 (Table 7 [sic - Table 8]). Agriculture, commerce, and transportation play an important role in growth by helping to integrate the nation’s economy.

Table 8.

Projections of GDP, Inflation, and Population (2005-09, 2014)

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Note that “real” means constant 1996 prices (because this is the base used by the INE - National Statistics Institute).

Note: Here and in the tables that follow, the figures for 2005 were obtained from the December 2005 Report on Budgetary Execution. In this preliminary report, the degree to which disbursements for externally-financed projects are included is still very incomplete. And so the amount of external financing is, in fact, much greater than the figures shown. The big increase from 2005 to 2006 reflects this problem. The actual increase is much smaller.

114. Big projects play only a minimum role—the only change is the startup of the Moma Heavy Sands Project in 2006-07. Therefore, the growth rates are not based these kinds of undertakings.

115. Note that the main impact of these kinds of undertakings on GDP is limited to a broadening of the basis of production (i.e., the size of GDP) during the first years of the project’s production. After the optimum level of production has been achieved, their contribution to the rate of real growth remains relatively low.

116. We should emphasize that certain important assumptions underlie these forecasts of growth, specifically:

  • Stability and peace, both internally and internationally;

  • Exploitation of the economy’s potential in agriculture, agro-industry, natural resources and tourism;

  • Continuity of public sector reforms, thus improving the business environment and access to credit, particularly rural credit;

  • A better banking system and greater sophistication in the financial system;

  • An additional effort to provide and maintain infrastructures;

  • Support for small and medium-scale companies;

  • Inflows of foreign capital in the form of aid and investment;

  • A deepening of external economic relations, particularly with the Southern African Development Community (SADC).

117. As an example of an improvement in the collection of public revenues from the use of natural resources, the document entitled Country Economic Memorandum: Mozambique estimates potential public revenues at US$67 and US$215 million in 2005 and 2015, respectively, compared with US$30 million in 2003, at constant prices (World Bank 2005a). As a percentage of tax revenues, these figures represent 5.3 percent and 11 percent in 2003 and 2005, respectively. This favorable trend of revenues in 2003 and 2005 will be possible if the best mechanisms for charging fees for the use of natural resources are implemented without any changes in the current legal situation. Government priorities for improving the revenue-collection mechanisms are discussed in Chapter VIII.

118. Potential exogenous risks for the Mozambican economy are (i) reduction in demand for exports; (ii) increases in the prices of specific imported commodities such as oil; (iii) a drastic drop in foreign aid; (vi [sic - iv]) weather-related shocks; and (vii [sic - v]) macroeconomic shocks.

The External Sector

119. The trends in the external sector are extremely important, inasmuch as the Mozambican economy [sentence incomplete - sic]. Mozambique is heavily dependent on external flows of funds, has a flexible exchange rate, and a relatively high level of imports, equivalent to 28 percent of GDP (excluding imports for megaprojects), while exports stood at 7,3 percent of GDP (excluding megaprojects) in 2005.

120. Projections for the external sector (Table 8 [sic - Table 9]) take an optimistic view of exports, while excluding production by large projects. The fundamental assumption is that the general growth of the economy rests on the sustainable expansion and improved competitiveness of export industries. This is crucial to the maintenance of desired levels of international reserves.

Table 9.

Projections of Foreign Relations Indicators (2005-09, 2014)

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121. Therefore, we emphasize the importance of properly appreciating the role of the country’s export sectors and avoiding actions that could harm them. In this case, monitoring focuses primarily on small and medium-size Mozambican exporters. This is an additional argument in favor of the objective of maintaining macroeconomic stability and reducing volatility in the exchange rate.

122. Parallel to these developments, we assume stability in the (global) balance of trade and a gradual and prudent strengthening of the net international reserves position.

123. Foreign aid will continue to be extremely important for financing the deficit in current account and ensuring stability of the economy vis à vis the rest of the world.

The Monetary Sector

124. In order to fulfill the goals of this sector, it is assumed that the objectives in the fiscal and external sectors will be achieved, since trends in monetary indicators are inherently linked to developments in these other sectors.

125. Expansion of the monetary base needs to be controlled in order to keep inflation rates low. The goals proposed here were based on projections of the inflation rate and the real growth rate during the period.

126. Projections for the external sector suggest that international reserves held by the Bank of Mozambique [sic - will improve?] gradually until 2014, from 2006 onward. If it proves to be impossible to achieve strong growth in exports while controlling imports, there may be mounting pressure on the exchange rate.

127. In terms of credit to the government, it is expected that deposits by the government will show a net increase until 2009. In other words, in net terms, the government will not receive credit from the banking system (Table 9). Instead, the increase in its deposits will contribute to an average 15 percent per annum increase in credit to the economy. This trend is also consistent with the strengthening of the primary deficit and support for monetary policy. Note that a failure of the government to exercise fiscal control could undermine the desired expansion of credit to the private sector.

(b) The Financial Envelope, 2006-09, 2014

128. The financial envelope defines the total volume of financing available to the government. It is consistent with other macroeconomic goals and the above forecasts of the behavior of the economy during the period.

129. The central objective is to continue mobilizing domestic funds, thereby increasing the sustainability of public finance over the long term.

130. In global terms, the basic scenario (Table 101 [sic - Table 10]) projects an annual average rate of growth slightly above 10 percent in total real funds available between 2005 and 2009. This increase comes mainly from collections by the government—a significant increase in total State revenues is forecast, from 14.0 percent of GDP in 2005 (in 2006 prices) to 16.2 percent in 2009. Note that the forecast increase in external resources in 2006 is due to the inclusion of off-budget items (resources that were previously not included in the State Budget) in 2006, and the low preliminary estimates for 2005.

Table 10.

Projections of Monetary Indicators (2005-09, 2014)

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131. This is due not only to the pace of the growth of the economy but, and especially, to the tax reforms and other public sector efforts mentioned in Chapters I and IV. However, it is recognized that these funds must be mobilized in a way that does not jeopardize growth of the private sector or undermine the incentives to pursue economic activities in the formal sector.

132. During PARPA II and until 2014, steps are expected to be taken to achieve greater integration with the economies of Southern Africa. The fiscal implications of these changes are being analyzed (a reduction in customs tariffs could lower Customs authority revenues, but it may also boost the total pre-tax value of imports, and so it is difficult to estimate the net effect on State revenues). Therefore, the forecast for the financial envelope used a conservative position with respect to the growth in revenues derived from foreign trade—it is assumed that revenues from foreign trade rise in tandem with total value of imports.

133. The basic scenario depicted in Table 11 reflects the heavy influence of external aid in State financial resources. Under this scenario, it is anticipated that the value of external funds available to finance State expenditure programs will remain approximately constant, in dollar terms, from 2006 onward (Table 11). Note that the forecast increase in external resources in 2006 (over 2005) is due to the greater coverage of the State budget, i.e., the inclusion of several external resources that were previously off-budget. Although this forecast is relatively conservative, it represents a prudent and moderate basis for guiding the expenditure programs; in other words, it is believed that this level of external assistance is viable over the medium term.

Table 11.

The Financial Envelope, at Constant 2006 Prices (2005-09, 2014)

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The increase in external resources between 2005 and 2006 is due to incomplete information on 2005 execution, as well as to the inclusion of 2006 off-budget resources.

For 2005, includes “other revenues and expenditures” equal to 326 mde (expenditure).

134. Under this scenario, it is anticipated that the value of external funds available to finance State expenditure programs will remain approximately constant, in dollar terms, from 2006 onward.

135. The projection as to the volume of external aid in the State Budget is neither a ceiling nor a fixed limit. The country remains open to additional flows of foreign aid, provided such assistance is aligned with the government’s activities and plans. The next section of this document discusses the possibility of a considerable increase in external funds and the fiscal implications of such an increase.

136. One implication of this scenario is that the size of the financial envelope in terms of GDP does not grow during the period (Table 121 [sic - Table 12]). This trend was based on the forecast about external resources and on the anticipated considerable decline in internal credit to the government. In fact, in line with the objective of ensuring fiscal balance and prudence, it is predicted that the State will begin to record a budget surplus between now and 2009 that is associated with greater mobilization of internal funds, control of the government’s current expenses, and an anticipated reduction in its financial operations.

Table 12.

Principal External Resources, in US$ Millions (2005-09, 2014)

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Including the Common Funds within the scope of the sectoral strategic programs

137. The scenario underlines the fact that a real increase in tax revenues is key to achieving consistency between economic development and tax and budget policies.

(c) Additional Funds in the State Budget 2006-2009, 2014

138. The Basic Scenario represents a prudent and consistent framework for guiding the drafting of the government’s expenditure programs during the medium term. However, this framework is not set in stone but is open to changes that are consistent with the actual execution of the economy, with new information, or with changes in relevant policies or goals.

139. In this section, we consider two important factors that may result in an upward revision of the value of the financial envelope. These are: (i) supplementary forgiveness of the State’s external debt; and (ii) a sustained rise in the volume of external aid provided to this country.

140. The budgetary implications of these possibilities are estimated in Table 13, in the form of different scenarios. To facilitate comparison among these scenarios, they are expressed in terms of an index of the principal components of expenditure. Therefore, for each component of expenditure in 2006, the index found in the basic scenario in Table 13 is equal to 100.

Table 13.

Scenarios Related to Additional Available Funds (2005-2009)

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Note: The scenarios refer to a real index for each component of expenditure, valued at constant 2006 prices. The actual figures for the basic scenario are presented in Table 14.

141. The Debt Forgiveness Scenario. Initiatives designed to forgive the external debt of the underdeveloped nations have proliferated worldwide. It is acknowledged that Mozambique should benefit from this sort of bold action. However, as PARPA II is being drafted, the details of such forgiveness as it may apply to this country are not yet clear, nor is the timing. Therefore, the basic scenario does not include any specific assumption as to a substantial increase in support for external debt service.

142. Despite the lack of concrete figures, it is possible to make a rough estimate of the budgetary impact of additional levels of external debt service assistance. The pessimistic scenario (Table 13) assumes that an additional external debt forgiveness program means a fresh allocation (or redistribution) to investment expenses of 15 percent of the expenditures related to debt service (interest and amortization), beginning in 2006. The optimistic scenario assumes a 30 percent redistribution in 2006, rising to 70 percent in 2008 and 2009. For the sake of simplicity, all scenarios assume that total resources released will be allocated to investment expenses. Note also that debt forgiveness does not represent an inflow of additional funds to the State Budget—total expenditure does not change.

143. These two scenarios show a significant fact—from the budgetary standpoint, debt forgiveness programs will not have a considerable impact in either the short or medium term. However, this does not mean that such programs are not important. Rather, they have a gradual effect (over the long term) and a positive effect on the capital account of the balance of payments that is not captured in this exercise.

144. Increase in external assistance scenario. Along with evaluation of data on supplementary assistance with debt service, there is discussion about increases in the volume of external aid to this country. Aside from the issue of the availability and quantity of additional aid, the government needs to reflect on the advantages and disadvantages of such an increase. Two interrelated questions arise in this context, specifically: (i) the government’s ability to absorb and manage more aid; and (ii) the danger that distortions may develop that are related to an increase in the aid.

145. And so the last scenario in Table 13 calculates (in real terms) the impact of a gradual entry of additional external assistance on total investment and overall expenditure—assistance beyond the value in the basic scenario. For example, Table 13 simulates an increase of US$75 million in 2007 that rises to US$150 million in 2009. This scenario shows that such additional funds would finance a higher rate of investment (e.g. 14.3 percent compared with 12.0 percent of the GDP forecast for 2009 in the basic scenario) and, consequently, an increase in the weight of total expenditure as percentage of GDP.

146. As for the problem of absorption, the government recognizes that when foreign aid is used effectively, it has spurred the efforts to reduce absolute poverty and achieve economic growth. It is also obvious that the country has not yet attained a level of sustainable economic growth that would require a substantial cut in the volume of assistance in the short or medium term.

147. Basic Principles for Application of Additional External Funds. In light of the possibility of a significant increase in external funding, the government has begun a process of careful reflection in order to lay down some basic principles to guide the use of extra ordinary external resources1 The key reason why those principles need to be defined is that flows of this type of funding will not continue indefinitely and so it would not be prudent to include those funds in the medium-term planning process. Clearly, they require a specific approach.

148. Two principles for allocating those resources have emerged from preliminary discussions. Priority in the allocation of high volumes of special external funding will be given to:

  • (a) Investments that need significant startup funding but can be sustained by lower funding during the implementation phase; and

  • (b) Interventions that stimulate the productive sector of the country’s economy.

149. Two concerns are associated with an inflow of high volumes of external funds: Dutch disease and the ability of the nation’s economy to absorb the funds.2 The focus on the production sector (b) will help address both concerns.

150. Lastly, note that these principles seek to prevent an incremental expansion in all headings of the expenditures scenario that is presented in the next section. An incremental expansion in all categories of expenditure would make implementation of those programs unsustainable after the extraordinary funding runs out.

151. Meanwhile, the government insists that despite the possibility of additional flows of funding, it would prefer external aid that flows smoothly and with appropriate predictability (see Chapter IX, section 4).

(d) Budgetary Accommodation of the PARPA

152. Budgetary accommodation of PARPA II translates into the overall financial program that will support execution of the actions by the State called for in that document.

153. This program is based on the Medium-Term Fiscal Scenario, a tool that the government updates annually and uses to chart the course of its financial program, as well as to prepare the annual budget.

154. The portion of the resources that are available in the State Budget for 2006-2009 is shown in the section on the financial envelope. Table 14 provides an overall summary of the fiscal program that illustrates both the trend in expenses and the financial constraints.

Table 14.

Summary of the Government Fiscal Program (2005-09, 2014), at constant 2006 prices

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Excludes internal debt amortization, which is part of the net internal credit.

For 2005, includes “other revenues and expenditures” equal to 326 mde (expenditure).

The internal primary balance measures the difference between total internal resources and internal spending, which includes expenditures financed through direct budget support.