Published on Africa Can End Poverty

Mozambique needs a new growth model for sustained, inclusive growth

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Mozambique has experienced rapid economic growth over two decades, from 1993 to 2015. During that period, the country's growth, which was mainly driven by the extractive industry and public investment, averaged 7.9% annually and was among the highest in Sub-Saharan Africa (SSA).

The revelation of undisclosed debts in 2016, colloquially known as “hidden debt,” led to sharp drop in growth, and prompted an economic governance crisis and a protracted economic slowdown, with growth falling to 3% in 2016-2019. The growth slowdown has been further exacerbated by the combined effects of natural disasters in 2019, the insurgency in Northern Mozambique, escalating since 2017, and the global pandemic since 2020.

Mozambique’s existing growth strategy has been limited in its capacity to generate productive jobs and support accelerated poverty reduction. Nearly two-thirds of the population lives in poverty and the country is among the most unequal in SSA. This partly resulted from Mozambique’s increased dependence on large extractive projects, with limited linkages with the rest of the economy, and low-productivity agriculture. There is an urgent need to create jobs for the 500 thousand people entering the labor force every year.

The recent discovery of some of the world’s largest natural gas (LNG) reserves could present Mozambique with a unique opportunity for sustained and inclusive growth. However, making the most of the anticipated LNG resources and bringing growth closer to the poor will require a new ambitious growth model that goes beyond the extractives. The latest Mozambique Country Economic Memorandum (CEM), Reigniting Growth for All, provides concrete recommendations for such growth model, which can be summarized in two main points: making the best use of the non-renewable natural resource revenues and promoting growth in non-extractive sectors, accompanied by spatial transformation, and improved agricultural productivity.

Mozambique needs to put in place an adequate policy and institutional framework well ahead of the revenue windfalls from the LNG sector. A well-functioning fiscal framework (including clear fiscal rules and targets) is essential for successful management of revenue volatility in the future. A well-managed sovereign wealth fund (SWF) can help achieve short-term stabilization and long-term savings for future generations. Prudent macroeconomic management would also involve a gradual increase of investment to take limited absorptive capacity into account, whilst improving the quality of public investments.

In addition to maximizing LNG revenue, it is essential to encourage growth in non-extractive sectors to foster broad-based economic growth. In a first phase, policies should be oriented towards maximizing the benefits of the resource-driven growth. This would require strengthening linkages between extractives and the rest of the economy and enhancing inter-sectoral linkages. Greater participation of the private sector, including in the services sector, is essential for economic transformation and job creation. The private sector could become an engine of economic transformation and job creation, but it is held back by several binding constraints that include weak regulatory and governance frameworks.

Mozambique could grow its services sector in size and sophistication. Backbone services—such as telecoms and transport and logistics—have the potential to spur growth in other export-oriented activities, including agribusiness and mining. This will require supporting an open trade and investment regime with a transparent and effective regulatory framework. Weak governance framework is hampering regulatory reforms needed for services sector growth, while corruption is cited by Mozambican firms as one of the top three obstacles to their operations.

Promoting a more inclusive growth will necessitate further efforts to raise agricultural productivity and increase rural mobility to connect farmers to markets and non-farm opportunities. Policies should support access to major corridors and markets, adoption of improved seeds and fertilizers. Further, it is crucial to build resilience to climate risks by expanding the coverage of safety nets, increasing the availability of weather warning systems, and fostering risk transfer mechanisms.

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