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A Mozambique Paradox

Shanta Devarajan's picture

There is widespread consensus that financial development is critical to economic growth, globally, and in Africa. Yet Mozambique, a country with very low levels of financial development (in a recent survey, only 13 percent of firms had obtained credit from the banking sector, rural credit is almost nonexistent), registered a GDP growth rate of over 8 percent a year over the last decade.

On a recent visit to Mozambique, I tried to understand this apparent paradox, but ended up with even more puzzles. A group of prominent bankers said the problem was that enterprises lacked managerial and accounting skills, which is why they didn’t want to lend to them. They insisted that subsidizing credit will not solve this problem. In a separate meeting, one of the most successful entrepreneurs in Mozambique said that even he has trouble getting credit; he needs to put up his factories as collateral, and even then it takes about seven months. Finally, the government’s plan to stimulate agricultural production includes a program of credit subsidies to farmers to buy tractors and other inputs.

So, while everybody seems to agree that access to finance is a constraint (which begs the question of how Mozambique grew so fast), there are different views on how to relax that constraint. I look forward to your comments and suggestions.


Submitted by Bruce on
My (perhaps simplistic) explanation would be that much of the high growth rates has come from foreign investments (the mega-projects, expansion of the sugar sector etc), most of which do not rely in any way on access to domestic finance. Meanwhile, the domestically-owned manufacturing sector isn’t contributing much to growth and has little credit access, as reported in the survey. Bruce

Submitted by Noah Rattler on
I would really like to know the source of the growth. Once that is determined, it may be possible to use the same principle to help non-credit-worthy countries get to the point where they are able to establish lines of credit.

Submitted by Patrick Honohan on


No paradox here. While financial development has been shown to help growth, no-one said it was indispensable. The process is not simply an additive one.

Also, the evidence indicates that finance is a more effective driver of growth when a country has reached lower-middle income level.

There are many examples of rapid growth unsupported by financial sector development, China being the most conspicuous case.

But note also that a good financial system shapes an economy for the long run in favorable ways, even if other factors (such as bounce-back from conflict) may for a while be dominant in driving spurts of growth.

Even if Mozambique had had a more developed financial system, its growth rate in this post conflict growth period might not have been higher. But with the right kind of financial development, growth might have been broader-based both in terms of economic sectors (and hence in building foundations for sustained move to middle-income status) and in its contribution to reducing inequality.


It seems high cost of finance is the constraint. But, within it, it is unclear whether bad international finance is a cause for this constraint. It also seems that low domestic savings is not a problem because the economy is growing at such an impressive rate and banks have liquidity but don't want to lend it. This leaves one possible explanation in the finance story: poor intermediation. Coordination problems and sharing of risk by the state on the credit extended to the private sector seems to be a good option.

What's the story on private appropriability of investment and taxes? Also, could lack of human resources be the constraint? Is there a very high rate of return for high skilled workers? More fleshing out of the Mozambique economy is needed!

Submitted by Shanta Devarajan on


Thanks for your thoughtful comment. I was thinking the same thing. Even if Mozambique managed to grow rapidly without financial depth, this growth is unlikely to be sustainable without further deepening of the financial sector. I'm still not sure, however, of how to get greater financial access in the country. Any suggestions?


Submitted by Anonymous on

clearly the growth has come from use of natural reosurces (75% of all exports in Mozambique 2007). Aluminium 61%, Electricity 10% and Gas 5%. I assume companies who, to date, have benefited from large tax concessions have no problem getting access to international credit.

Submitted by Pat on

Banks in Mozambqiue as elsewhere in SSA don't take up risks -and invest their liquidity in treasury bills. Their credit technology is not appropriate for the context. have a look at microfinance institutions - partially also lending to SMEs - and the good performance (growth rate, portfolio quality) they have. finally, I also think that a large share of this strong growth rate is related to mega-projects and big companies.

Submitted by Carlos on

Thanks Shanta for bringing Mozambique to the debate.

You are right. Mozambique has been growing faster without access to credit and finance in general by firms. That leads us to the obvious conclusion that growth has been driven by something else, not by a normal process of wealth generation through improved competitiveness of the firms, employment generation, technological innovation etc. This is what you would expect under normal circumstances.

So, where does this credit-neutral growth comes from?

It comes from two main sources:

First, massive inflows of ODA. Donors have consistently increased their aid to Mozambique. Not surprisingly, the country is highly dependent on aid. In 2006, Mozambique received approximately $1.5 billion in ODA, which accounted for 23% of its Gross National Income. Presently, and for the last ten years or so, ODA finances 50% of the state budget. Therefore, under these circumstances, Mozambique does not need a vibrant private sector to grow, and credit is less important. What is important is the capacity to spend more and more aid, building schools that some end up not having teachers, hospitals and roads.

Second, FDI inflows. Following the end of civil war in 1992, Mozambique has bee receiving a considerable amount of FDI, mainly in form of megaprojects (Mozal, Sasol, Moma Havey Sands, etc). These megaprojects have played a critical role in economic growth and exports, despite their poor performance in terms of job creation and linkages with the rest of the economy. Do megaprojects borrow from local banks? No! They bring their own capital, and they access capital markets at lower transaction costs and lower interest rates. So, does local credit matter to this source of growth? Again, the answer is No.

As to why banks are not lending to business, it is correct that part of problem is the lack of managerial skills by business. But I think the main problem is that banks have alternative ways of making money: buying Treasury Bills which yield 10-15 real return a year, and charging customers exorbitant fees for every transaction (including checking balance in an ATM). At the end of day, banks have no incentives to take risk by lending to business.

Concluding, there is no paradox in Mozambique. The recipe is clear: get aid, spend it and grow. Cost: dependency and vulnerability.

Submitted by Vifer on
Hello Shanta, I do not believe that access to finance is an absolute constraint. Of course, if you start completely from zero, for the purchase of machinery and equipment you need credits. But if you have a history of agricultural enterprise and your enterprise is not formed a year ago - you should have some resources to grow and develop gradually and steadily. Regards, Vifer

I agree with this - it actually reflects how low the GDP was before these donor funding & big projects came along and boosted the %age. At its lowest Mozambique was the 2nd poorest country in the world - you can almost see an aid spurt, a no growth year or two and then an investment spurt following the end of the war. Mozal's revenue in 2006 was $2 billion while Mozmbique's GDP was $16.3 billion

Submitted by Alex Taylor on
Shanta, Any county that deprives from giving loans to its rural community will no doubt hinder their own growth. Having said that, most successful entrepreneurs from africa or asia region knows that it is very much part of conducting a business. So its high time that international bank take note of this and help to those who matters. Its better late than never. That's the only way to sustain growth for any country as a whole. Mark,

Following my own exploration, billions of persons in the world receive the personal loans at good banks. So, there's a good possibility to receive a short term loan in any country.

Submitted by Manuel Rosa Martins on
Clearly there is enough liquidity and financing to bloodstream such comprehensive and repeatedly reported growth. Mozambique, like any country with strong Muslim influence, has informal banking up and running for centuries through trade, local commerce (small & medium size distribution sector) and land produce. Actually it has been a good thing that the formal banking sector does not hold too much, or only marginally, this blossoming informal economy. This way Mozambique is spared the financial turmoil of the past 2 years and gets all the banking that it needs, no marketing effort on consumerism there. The snag is that the government is hindered on larger investments. The pro is that this way the country is safely away from the panics of the financial markets, bond markets included. I would look deeper to see if there are mobile phone small-scale financial transactions going on at a considerable rate. Maybe the cat is over there, informal and quick as the speed of light.

Submitted by Siiri on
I would like to point out that this seemingly paradoxical situation may be a result of aid dependency. 58% of the governments spending in 2009 came from aid (of foreign governments and of organizations). This means the growth is quite superficial and Mozambique is not doing as well as it seems to be doing. I am writing my dissertation on this very topic.

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