Avoiding the Resource Curse in Mozambique

The discovery of huge reserves of natural gas, coal deposits and rare earth minerals could be a game changer for the southern African country of Mozambique. With natural resource wealth estimated to generate annual revenues reaching $9 billion dollars or approximately 7% of GDP by 2032, the question then becomes “how will the country manage this revenue boom?”   
 
Mozambique faces the paradox of having one of the fastest sustained growth rates in Africa and one of the lowest ranking human development index (HDI). However, achieving shared prosperity and ending extreme poverty could now be a reality. Realizing this potential will require concerted efforts and sound management to avoid succumbing to the dreaded resource curse.
 
The last few years have seen significant increases in public spending (well above regional peers), rising debt levels, and a widespread perception that governance efforts are stalling. To reverse these trends and anticipate a projected surge in resource revenues, set to occur toward the end of the decade, Mozambique needs to use the next several years to strengthen fiscal management and improve the institutional environment.
 
Based on experiences in other resource rich countries, Mozambique could take the following six steps to steer the country on the path of inclusive growth and development:
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1. Design a fiscal policy framework adapted to Mozambique’s context. For too long the mainstream advice for developing countries was to save resource revenues and invest them abroad. Given Mozambique’s urgent development needs, scaling up public investment and spending on health and education in line with absorptive capacity constraints seems more appropriate. Fiscal targets can be introduced to support this – such as Botswana’s expenditure growth target or Chile’s non-resource primary balance target. These targets can be supported by a fiscal rule, but this will only be credible if policy-makers stick to it.
2. Establish a resource fund. A fund could serve a number of objectives. A stabilization fund would address revenue volatility while a savings fund would help address absorptive capacity concerns while preserving wealth for future generations. The fund should focus on investing abroad to diversify risks – investing domestically could contribute to overheating and boom-and-bust cycles. 
3. Consider adopting a broader sovereign asset and liabilities strategy.  The discovery of natural resources has facilitated access to more complex financing mechanisms such as public-private partnerships (PPPs) and non-concessional loans to finance public investments, which can generate significant contingent liabilities and fiscal risks. To avoid jeopardizing an otherwise prudent fiscal policy, these risks need to be managed, starting with greater disclosure of assets and liabilities in budget documentation.
4. Ensure the fiscal policy framework is well integrated in the budget. All public spending must be done through the national budget and parallel processes should be avoided. In particular, simple and transparent rules should guide how revenues from the resources fund(s) are spent through the budget.
5. Invest in institutions – in particular the country’s capacity to manage a larger public investment portfolio. Countries with strong governance have translated natural resource wealth into other forms of physical and human capital. This involves strengthening public financial management systems, prioritizing the transparency of public spending, and improving public investment management capacity.
6. Manage expectations.  Unmet expectations could lead to widespread dissatisfaction, social unrest or even outright conflict. To avoid this, the government of Mozambique must engage in building an enduring consensus which requires a high degree of transparency and accountability, explaining to the country how the resources are being utilized.

 
The extent to which Mozambique will be able to capitalize on its considerable natural resource wealth depends on how it prepares for its future. The time is ripe to start engaging the public to manage expectations and to strengthen institutions, setting the foundations for the considerable changes ahead.

To read a World Bank policy note discussing these issues, please visit: http://www.worldbank.org/en/country/mozambique/research