MOZAMBIQUE ECONOMIC UPDATE Mind the Rural Investment Gap December 2019 mozambique economic update december 2019 The World Bank’s Mozambique Economic Update (MEU) series is designed to present timely and concise assessments of current economic trends in Mozambique in light of the country’s broader development challenges. Each edition includes a section on recent economic developments and a discussion of Mozambique’s economic outlook, followed by a focus section analyzing issues of particular importance. The focus section in this edition explores the disparities in access to basic infrastructure for service delivery between Mozambique’s provinces and provides recommendations to improve the distribution of the public investment program. The MEU series seeks both to inform discussions within the World Bank and to contribute to a robust debate among government officials, the country’s international development partners, and civil society regarding Mozambique’s economic performance and key macroeconomic policy challenges. The cutoff date for the current edition of the MEU was November 30, 2019. i Contents Abbreviations and Acronyms ......................................................................................................................................... iv Acknowledgements ...................................................................................................................................................... v Executive Summary ...................................................................................................................................................... 1 Part One: Recent Economic Developments ........................................................................................................ 4 Economic Growth .................................................................................................................................................. 4 Exchange Rate and Inflation ................................................................................................................................ 9 The External Sector ................................................................................................................................................. 10 Fiscal Policy ............................................................................................................................................................... 14 Monetary policy ...................................................................................................................................................... 19 Part Two: Mind the Rural Investment Gap ............................................................................................................ 23 A Growing Gap in Access to Basic Infrastructure ........................................................................................... 24 Did the Public Investment Program Contribute to the Growing Disparities in Access? ...................... 26 The Spatial Distribution of the Public Investment Program ......................................................................... 27 Why Invest in Closing the Rural Investment Gap? ......................................................................................... 30 How to Close the Rural Investment Gap? ........................................................................................................ 33 References ..................................................................................................................................................................... 36 FIGURES Figure 1: Reduction in electric lighting in Beira after Idai .............................................................................. 5 Figure 2: Estimated number of poor directly affected by floods and destructive winds associated with Cyclone Idai ..................................................................................................................................... 5 Figure 3: Cyclonic shocks have weakened crop production in 2019 ........................................................ 7 Figure 4: … and coal production is also lower .................................................................................................. 7 Figure 5: In contrast, demand for service and manufactured goods is starting to recover ................. 7 Figure 6: GDP growth is expected to narrow in 2019, before recovering towards 5 percent in 2021 ... 7 Figure 7: Requests for bribes are increasing and most common when obtaining a construction permit or electricity connection ......................................................................................................... 8 Figure 8: If all local good practices were adopted, Mozambique’s global performance would improve by 22 places ............................................................................................................................................. 9 Figure 9: Lower food price pressures have contributed to an easing in overall inflation .................... 10 Figure 10: The recent real exchange appreciation may be contributing to slower non-extractive export growth .......................................................................................................................................... 11 Figure 11: The CAD (excluding capital gains) is set to remain stable in 2019 ............................................ 12 Figure 12: …as lower import levels .......................................................................................................................... 12 Figure 13: … offset a drop in commodity exports ............................................................................................... 12 Figure 14: High FDI levels continue to support the external position .......................................................... 12 ii mozambique economic update december 2019 Figure 15: Progress in fiscal adjustment has been reverted in 2019 .............................................................. 17 Figure 16: Spending on priority sectors is set to pick up in 2019 reflecting higher capital expenditures .......... 17 Figure 17: Currency appreciation has helped to bring total debt down .............................................................. 17 Figure 18: …but domestic debt pressures are growing ............................................................................................. 17 Figure 19: Inflation easing has set the stage for further policy rate cuts but at a gradual pace ….................. 20 Figure 20: … whilst FX reserves requirement increased during the year ............................................................... 20 Figure 21: …but interest rates remain amongst the highest on the continent .................................................... 20 Figure 22: …which has contributed to dampened credit growth ........................................................................... 20 Figure 23: Growth in mobile wallets has exceeded bank accounts ....................................................................... 21 Figure 24: …but women continue to be underpresented ........................................................................................ 21 Figure 25: Mozambique has a large infrastructure gap ............................................................................................. 23 Figure 26: Regional disparities in access are evident ................................................................................................. 24 Figure 27: …and largely mirror the country’s poverty trends .................................................................................... 24 Figure 28: Public administration was the largest investment spending category prior to 2015 ..................... 27 Figure 29: … but fiscal consolidation contributed to shedding of public administration spending ............... 27 Figure 30: Insufficient progress was made in channeling resources to underserved areas ............................ 28 Figure 31: …with expenditure trends mirroring access indicators .......................................................................... 28 Figure 32: A large share of the budget for roads focused on urban connectivity, whilst non-roads spending is more evident as the levels of urbanization decrease ......................................................................... 29 Figure 33: Investment levels tend to have a weak relationship with population growth ................................. 29 TABLES Table 1: Growth outlook ................................................................................................................................................ 6 Table 2: The Balance of Payments .............................................................................................................................. 13 Table 3: External outlook ............................................................................................................................................... 14 Table 4: Government Finances (commitment basis) .............................................................................................. 18 BOXES Box 1: Exposure and socioeconomic vulnerability to Cyclone Idai ................................................................ 5 Box 2: What is the recent experience of Mozambican firms with corruption? ............................................ 8 Box 3: Advancing reforms for an enabling business environment – evidence from Mozambique’s Subnational Doing Business .......................................................................................................................... 9 Box 4: Strengthening financial inclusion in Mozambique: progress to date and further reforms needed ... 21 Box 5: The access to basic infrastructure index ................................................................................................... 25 Box 6: The economy-wide model ........................................................................................................................... 30 Box 7: District level fixed effects model specifications ....................................................................................... 32 iii Abbreviations and Acronyms BdM Bank of Mozambique (Banco de Moçambique) BoP Balance of Payments CAD Current-Account Deficit CGE Computed General Equilibrium (model) CGT Capital Gains Tax CPI Consumer Price Index FAO Food and Agriculture Organization of the United Nations FDD State Development Fund (Fundo de Desenvolvimento Estatal) FDI Foreign Direct Investment FPC Standing Lending Facility (Facilidade Permanente de Cedência) FPD Standing Deposit Facility (Facilidade Permanente de Depósito) GDP Gross Domestic Product GEP Global Economic Prospects GFSM Government Finance Statistics Manual GIEWS FAO Global Information and Early Warning System IMF International Monetary Fund INE National Statistics Institute (Instituto Nacional de Estatística) IOF Household Survery (Inquérito sobre Orçamento Familiar) IPI Industrial Production Index LIC Low Income Countries LNG Liquefied Natural Gas MASA Ministry of Agriculture and Food Security (Ministério de Agricultura e Segurança Alimentar) MBTU Million British Thermal Units MEF Ministry of Economy and Finance (Ministério da Economia e Finanças) MIMO Interbank Reference Interest Rate. MPC Monetary Policy Committee MPO Macro-Poverty Outlook MSME Micro, Small and Medium Enterprises Mt Metric tons MZN New Mozambican Metical NPL Non-Performing Loan NSO National Statistics Organization PER Public Expenditure Review PERPU Urban Poverty Reduction Program (Programa de Redução da Pobreza Urbana) PMI Purchasing Managers Index RCF Rapid Credit Facility REER Real Effective Exchange Rate SADC Southern African Development Community SAM Social Accounting Matrix SOE State Owned Enterprise SSA Sub-Saharan Africa UNICEF United Nations Children’s Fund US United States USD United States Dollar WB World Bank WDI World Development Indicators WEO World Economic Outlook iv mozambique economic update december 2019 Acknowledgements This edition of the Mozambique Economic Update was prepared by a team led by Shireen Mahdi (Senior Economist, EA1M2). The team included Anna Carlotta Allen Massingue (Research Analyst, EA1M2), Fernanda Ailina Pedro Massarongo Chivulele (Research Analyst, EA1M2), Brigida Tchamo (Program Assistant, AFCS2), Ruben Barreto (Consultant, EA1F2), Julian Casal (Senior Financial Sector Economist, EA1F2) and Javier Baez (Senior Economist, EA1PV). Peer reviewers were William G. Bataille (Lead Economist, EA1M1), Jean-Pascal Nguessa Nganou (Senior Economist, EEAM1) and Ricardo Santos (Research Fellow, UNU-WIDER). The report was prepared under the overall guidance and supervision of Mark R. Lundell (Country Director, AFCS2) and Mathew Verghis (Practice Manager, EA1M2). v executive summary Executive Summary manufacturing, backbone services or non- Recent Economic extractive export growth. So, having put much Developments. of the past economic volatility behind, structural reforms for more sustainable and inclusive As 2019 drew to a close, a year when growth must return to the center of the agenda, Mozambique faced devastation caused by two with the objective of recovering from the recent severe cyclones, the country looks ahead having cyclones in the short-term and, in the medium made significant progress in terms of economic term, of using the LNG opportunity to produce, stability, having strengthened its external buffers export and employ. and having improved its fiscal position. The metical has been broadly stable since mid-2017, contributing to reduced inflationary pressures Estimated number of poor directly affected by and providing room for an appropriately floods and destructive winds associated with cautious monetary policy easing cycle. Growing Cyclone Idai investment flows, mostly linked to the extractive 1 331 868 industries, have bolstered international reserves. Additional progress has been made in fiscal management with a notable reduction in the primary deficit between 2015 and 2018 and 638 941 significant efforts to protect priority spending. 375 720 317 207 Plus, with the progress to date in advancing its LNG interests, there is much to anticipate from the coming years. So, in this context and as the government enters a new term, where should Sofala Manica Zambezia Total the focus of policy makers be? Source: World Bank staff calculations. The challenge remains to be growth. Growth The fiscal outlook is also challenging. Having was set further back in 2019 as Cyclones Idai and made progress in consolidating public finances Kenneth and slower coal production affected up to 2018, the costs of the cyclone response, output and is expected to fall to around 2.3 the electoral cycle and a still growing civil service percent in 2019, down from 3.3 percent in 2018. wage bill forced the departure from this trend With a population growth rate of 2.8 percent, in 2019. And although debt levels have declined this translates into a decline in the standard of since 2016, the debt burden is still elevated. living. Poverty has been further aggravated by Thus, the outlook points to a tight fiscal setting the cyclones, which are likely to have impacted and requires near term measures to reduce the both the urban and rural poor in the affected deficit. A persistent focus on increased efficiency areas. Growth is expected to accelerate with in expenditure, tackling the sources of fiscal developments in the LNG sector and progress risk and continued improvements in revenue in post-cyclone reconstruction. But much of this management is essential in the coming years expected growth is generated from the demand to bring financing down whilst meeting national side of the economy, namely extractives-led development needs. And whilst significant investment and growing consumer demand, progress has been made with subsidy reforms and less so from the supply side such as in recent years, measures to control the civil 1 mozambique economic update december 2019 service renumeration and to restructure loss- significant deterioration in rural connectivity and making SOEs are critical. contributing heavily to the overall decline in the measure of access to basic infrastructure. Lastly, Mozambique is entering a period of widening current account deficits as it enters With this context in mind, the report asks if the the early stages of the LNG investment cycle. large increases in public expenditure during As in previous years, the current account deficit Mozambique’s 2009 to 2015 investment boom is expected to be largely financed by foreign years boosted funding to the underserved direct investment and, increasingly, by LNG areas: did the public investment program project financing. It enters this cycle with an seek to address the growing disparities? The improved external reserve position bolstered by results indicate that the provinces with the investment inflows. But lackluster non-extractive lowest levels of access to basic infrastructure export performance, lower growth in key trading in 2009 were amongst the least well-funded in partners and commodity price movements subsequent years. Per capita investment levels continue to be a source of external risk for were relatively lower in northern and central Mozambique. Moreover, large forex inflows zones, especially Nampula, Zambezia and in the medium to long-term are an additional Cabo Delgado, which are amongst the most source of risk if not well managed. Mozambique underserved areas. It also indicates that capital is set to receive a significant influx of foreign investment in roads has been skewed towards currency: firstly to finance LNG projects then, urban areas, contributing to the declining rates towards the end of this decade, as natural of rural connectivity, whereas the non-road resource revenues. If not well managed, this capital budget was more balanced, potentially influx could result in a significant strengthening reflecting progress in rural water, electricity and of the local currency which would erode health access. Moreover, the analysis notes that Mozambique’s competitiveness on the global only 42 percent of the investment budget went market and place further pressures on the to capital expenditure on basic infrastructure for external position. Mismanagement could also service delivery between 2009 and 2015, with hinder the good use of these resources through the remainder going towards non-capital outlays a well-executed public investment program and such as administrative and overhead costs. savings of surplus income for future generations. Mind the rural Composition of the investment budget (%) investment gap. 2009-15 The special focus section of this edition of the 22% Mozambique Economic Update places a spotlight Public Administration on public investment in basic infrastructure, a topic of significant importance if Mozambique is to raise equality in opportunity and pursue more inclusive growth. First, it asks whether 36% 42% Recurrent Capital disparities in access to basic infrastructure are growing or declining. The analysis finds that overall, disparities have been growing between rural and urban areas, especially in the rural Source: World Bank staff estimates based on MEF and BOOST. parts of Mozambique’s central and northern provinces. Beneath the regional trends is mixed The section concludes by recommending performance at the sectoral level, with mild setting specific targets to reach underserved improvements in access to water, electricity areas in the Plano Quinquenal do Governo and and health facilities. However, access to the Plano Económico e Social, taking a forward- transport deteriorated significantly, along with looking approach to target areas with growing a moderate deterioration in access to primary populations, revising budget allocation formulas schools, on average. The deterioration in access to account for access gaps and reducing the to transport is particularly notable, indicating a misallocations of investment resources to 2 executive summary recurrent or administrative uses through a sound widen fiscal space significantly in the late 2020s. public investment management system. Looking In this favorable context, such reforms will help ahead, Mozambique is approaching a second in getting public investment priorities right to investment boom in the coming decade as ensure that the population benefits evenly from revenues from gas production are expected to these resources. 3 mozambique economic update december 2019 Part One: Recent Economic Developments Economic Growth the severe weather that accompanied the cyclone is estimated to have destroyed about 15 percent Mozambique’s reliance on the extractive of planned agricultural output for the year, a large sector and exposure to climate shocks was dent to a sector that accounts for 22 percent evident in 2019 as lower coal production of GDP.3 As a result, Mozambique is currently and tropical cyclones contributed to a experiencing severe food insecurity in some areas further reduction in growth. with an atypically high number of households in need of emergency assistance.4 Production of key Still healing from the economic fallout that cash crops which contribute to exports, such as followed the hidden debts crisis, Mozambique’s cotton and sugar, was also affected (Figure 3). economy was set further back in 2019 as Cyclones Idai and Kenneth1 and slower coal Furthermore, coal production, which had been production dented output. GDP growth is an important driver of growth since 2017, has expected to fall to around 2.3 percent in 2019, slowed. Coal is affecting growth in two ways. down from 3.3 in 2018.2 With a population growth Firstly, base effects are at play: with the 2017- rate of 2.8 percent, this translates into a drop in 2018 ramp-up phase that had bolstered growth GDP per capita in real terms and with this, a decline in those years now slowing, production volumes in the overall standard of living. Poverty has been are more stable at a higher level. Secondly, coal further aggravated by the cyclones, which are likely operations have been affected by the heavy to have impacted both the urban and rural poor in rainy season at the start of the year, causing the affected areas (Box 1). production targets to be revised downwards for the second year in a row.5 With coal accounting Cyclone Idai’s impact on agricultural production for 71 percent of extractives exports last year, is one of the main contributors to lower growth and 33 percent of overall exports, these expectations. The cyclone reached Mozambique circumstances have contributed to a significant just before the first and largest harvest season of drop in the extractive sector’s contribution to the year and affected an area representing almost growth in 2019 (Figure 4). a quarter of Mozambique’s agricultural production. And whilst not all production in the area was lost, It is positive to note that private services and 1 In March and April 2019, Mozambique was struck by two consecutive major cyclones with significant impacts on local populations, business and core infrastructure. More than 1.7 million people were affected, with damages and losses amounting to US$ 3 billion, and an estimated US$ 3.2 billion of total cost for recovery and reconstruction. 2 The World Bank forecast for GDP growth in 2019 was revised downwards from 3.7 percent to approximately 2.3 percent post-cyclone Idai. GDP growth fell to 2.4 percent in the first half of 2019, down from 4.1 percent in 2018 and an average 4.2 percent over the last three years. 3 World Bank staff estimates based on data shared by the Ministry of Agriculture and Food Security (MASA). 4 FewsNet, Food Security Outlook for Mozambique, June 2019. 5 In August 2019, Vale Mozambique revised production target for 2019 to from 14 million tons to 10 million tons, after having revised last year’s production targets from 16 million tons to 12 million tons.(see https://clubofmozambique.com/news/ vale-revises-moatize-coal-production-downwards-139289/). 4 part one: recent economic developments manufacturing, which together accounted of from 1.1 percent in the first half of 2018 to 1.3 39 percent of GDP in 2018, are slowly starting percent in the same period of 2019. This trend is to recuperate. Stimulated by improving investor echoed by Mozambique’s Purchasing Managers sentiment with progress in LNG investments, Index (PMI). This indicator of economic health easing interest rates and gradually recovering for manufacturing and service sectors6 shows a private demand, private services and manufacturing gradually improving trend backed by growth in slightly increased their contribution to growth new orders and a pick-up in production (Figure 5). Box 1: Exposure and socioeconomic vulnerability to Cyclone Idai Cyclone Idai, one of the worst tropical have ravaged livelihoods in rural areas along cyclones on record to affect Africa, struck its path, chiefly agricultural activities. Sofala mostly the provinces of Sofala, Manica and and Manica, for instance, are important southern Zambezia, causing catastrophic producers of maize, contributing nearly 30 damages. It is estimated that around 2,3 percent of the total production nationally. million people resided in areas exposed to Overlaying the trajectory of the cyclone with potentially destructive winds (above 119km/ land use maps suggests that a significant share hour) and flooded by the torrential rains, equivalent to around half of the total output of exceeding in some parts 50 centimeters. The maize may have been affected by the event. city of Beira was one of the areas hardest Furthermore, evidence from Jokwe, a cyclone hit by Idai. Satellite data on nighttime lights, of comparable magnitude that made landfall a proxy of economic activity, fell by 75 in Mozambique in 2008, shows large drop on percent relative to the levels of luminosity consumption, food security and assets, which pre-disaster, indicating major damages to translated into sizable increases in poverty infrastructure and economic systems in the among affected households. An analogous city. The burden of the destruction appears level of vulnerability is seen in the parts from to have disproportionally affected the parts Sofala, Manica and Zambezia impacted by Idai, of the city with the largest concentration of where over half of the population affected (1.3 poor households. million people) were already poor and many more were close to falling back into poverty Along the same lines, Idai is expected to if hit by a large shock. Figure 1: Reduction in electric lighting in Figure 2: Estimated number of poor Beira after Idai directly affected by floods and destructive winds associated with Cyclone Idai 4,000 Cyclone Idai (March 15) Sum of nighttime 1 331 868 light luminosity 3,000 2,000 638 941 1,000 375 720 317 207 0 1 M 2 M 3 M 4 9 24 1 ch ch ch ch ch ril ch Ap Sofala Manica Zambezia Total ar ar ar ar ar ar M M M Source: World Bank staff calculations based on nighttime Source: World Bank staff calculations. light data from VIIRS. Source: Poverty Global Practice - World Bank. 6 The Purchasing Managers’ Index™ (PMI) published by Standard Bank is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). 5 mozambique economic update december 2019 Growth is projected to accelerate in the production, professional services, real estate and medium-term with developments in the transport, amongst others. Ensuring that steady LNG sector and progress in post-cyclone progress is made in strengthening the business reconstruction. environment, including at the sub-national level, will improve operating conditions for firms Mozambique is expected to follow an upward (see Box 3). Another important reform area is growth trajectory over the coming years as it increasing the supply of skilled labor to firms. In prepares to experience a second FDI boom. the long term, an improved education system Progress with the post-cyclone reconstruction would enhance the supply of skills, but in the program, a kick-off in the development short to medium-term, easing access to foreign of Mozambique’s large LNG projects and labor where skills gaps exist may be beneficial. recovering investor confidence, supported There are a number of other areas, including by monetary policy easing and higher foreign reforms to support more rapid development direct investment (FDI) inflows are expected of backbone digital services, promote financial to steer growth towards 5 percent by 2021 inclusion and improve property rights. If paired (Figure 6). After this, growth is set to begin with improvements in infrastructure and increasing sharply in the mid-2020s as LNG connectivity, such a focused structural reform production begins. program would provide a more conducive setting for future growth. Although the LNG industry will create an impetus for growth in the medium-term, Post-cyclone rehabilitation efforts will also the challenge of ensuring that these gains influence the pace of the growth recovery in can boost growth and job creation in the central Mozambique. The reconstruction and broader economy remains. As Mozambique’s recovery program could provide much-needed LNG prospects begin to materialize and send stimulus to the economy in the short-term, a positive signal to foreign investors, policy although the extent depends on two factors: focus should increasingly be oriented towards financing and absorption capacity. The authorities improving the macroeconomic management to estimated the total damages and losses caused help de-risk the Mozambican setting, particularly by cyclones Idai and Kenneth at US$ 3.2 billion, through more a sustainable debt outlook, of which approximately 38 percent has been improved fiscal transparency and by tackling pledged by donors for relief and reconstruction. corruption (see Box 2). The ability to convert pledges into disbursements will be key in defining the timing and pace of the Faster progress in the implementation of recovery. As it stands, the disbursement profile for structural reforms will further strengthen many of the pledged amounts remains unclear. linkages between the LNG sector and the rest More important still, will be the authorities’ ability of the economy. As the LNG sector begins to ensure efficient and timely resource absorption investing, inflows into the economy will create through strengthened implementation and demand for a number of sectors, including food transparency mechanisms. Table 1: Growth outlook 2018 2019p 2020p 2022p Real GDP, % ∆ 3.3 2.3 4.3 5.0 Source: World Bank staff estimates. p = Projection 6 part one: recent economic developments Figure 3: Cyclonic shocks have weakened crop Figure 4: … and coal production is also lower. production in 2019… Production of key agricultural goods (% change), 2017 -19 Coal production (metric tons) and prices (US$/mt), 2015 – 19 20% 14,000 120 15% 12,000 100 10% 10,000 80 5% 0% 8,000 60 -5% 6,000 -10% 40 4,000 -15% 20 -20% 2,000 -25% - 0 Actual 2017/18 Estimates 2018/19 2015 2016 2017 2018 2019f Maize Rice Legumes Tubers Coal production Coal prices, RHS Source: MASA. Source: Vale Mozambique. Figure 5: In contrast, demand for service and Figure 6: GDP growth is expected to narrow manufactured goods is starting to recover in 2019, before recovering towards 5 percent in 2021 Quarterly growth (% change) and Purchasing Managers GDP growth (% change), 2014 – 21 Index (> 50 = an improvement), 2018 - 19 54 4.5% 9% 52 4.0% 8% 7.4% 3.5% 7% 6.7% 50 3.0% 6% 5.0% 48 2.5% 5% 3.8% 3.7% 4.3% 46 2.0% 4% 3.4% 1.5% 3% 2.3% 44 2% 1.0% 42 0.5% 1% 40 0.0% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 -1% 2014 2015 2016 2017 2018 2019f 2020f 2021f 2018 2019 Quarterly growth in private services and Agriculture Extractives Manufacturing construction, RHS Private Services Public Services Purchasing Managers Index Tax GDP Source: INE; Standard Bank Mozambique / IHS Markit. Source: INE; World Bank staff estimates. 7 mozambique economic update december 2019 Box 2: What is the recent experience of Mozambican firms with corruption? According to Mozambican firms, corruption is trends (41 and 33 percent, respectively). It a major problem. Corruption, major or petty, is thus, of concern that in the most recent is undesirable. A third of Mozambican firms World Bank enterprise survey (2018), have cited it as a significant constraint to Mozambican firms cite corruption as the their activities, mirroring regional and global main obstacle for their businesses. Figure 7: Requests for bribes are increasing and most common when obtaining a construction permit or electricity connection % of firms that said "yes" 30 20 10 0 Getting import cleared Getting export cleared Paying taxes Getting an operating license Getting an electrical connection Getting a water connection Getting a phone connection Getting a construction permit Getting an import license 2007 2018 What are the bribes paid for? Firms and in sub-Saharan Africa. Bribes to get report typically being asked to make an import or an operating license are also informal payments when obtaining prevalent. Another type of corruption that public services. Bribes to get electricity many Mozambican firms face are payments or water connections and construction- to secure government contracts, which is related permits are the most widespread. experienced by 13 percent of firms that Demand for these bribes has increased reported having secured or attempted when compared to 2007 and is at or above to secure a government contract in the the average levels recorded both globally previous year. Source: Mozambique Enterprise Survey, 2018. 8 part one: recent economic developments Box 3: Advancing reforms for an enabling business environment – evidence from Mozambique’s Subnational Doing Business The 2019 subnational doing business of the global ranking on trading across (SDB) assessment found pockets of borders. The assessment, which considers good practice in Mozambique, which, if four regulatory areas impacting the scaled up nationally, would significantly business environment across the country improve the business environment. For (starting a business, registering property example, the Ressano Garcia border and enforcing contracts) also found that post, where there has been a gradual contract enforcement is an area where implementation of the one-stop border Mozambique performs well at five points post project, ranks near the top third above the average for SSA. Figure 8: If all local good practices were adopted, Mozambique’s global performance would improve by 22 places… 2013 2014 2015 2016 2017 2018 2019f Hypothetical 110 115 120 125 130 135 140 145 150 Mozambique's overall ranking SSA average SADC average CPLP average Source: World Bank Doing Business database. Mozambique’s overall ranking would jump Mozambique’s current ranking). Similarly, a 22 places (assuming all other countries stay location where property registration takes 37 the same) if all country-wide good practices days (as in Inhambane), costs 5.2 percent of were adopted. The SDB findings show that the warehouse value (as in Maputo City and provinces across Mozambique have much to Zambezia), requires seven procedures (as in learn from each other, and that some reforms six provinces14) and has a score of 10 on the are of an administrative nature and can be quality of land administration index (as in Tete) implemented in a short period of time. A would rank 113 — a jump of 20 places in the hypothetical location where a commercial global ranking. Altogether, the assessment dispute is solved in 348 days (as in Tete), shows that by adopting all the good practices costs 21.8 percent of the claim value (as found at the subnational level across the four in Manica) and scores 8.5 on the quality of indicator areas, Mozambique’s ranking would judicial processes index (as in four provinces) jump 22 places on the overall ease of doing would stand at 35 in the global ranking business, from 135 to 113 – exceeding the on this indicator (132 places higher than average for SADC countries. Source: Doing Business in Mozambique 2019 - World Bank. Year-on-year inflation stood at 2.6 percent in Exchange Rate November 2019 (down from 4.3 a year earlier) and Inflation placing 12-month average inflation at 2.8 percent. Mozambique has now gone from being Inflationary pressures remain low in a one of the countries on the continent with the context of subdued domestic demand. highest inflation rate (having peaked at 26 percent 9 mozambique economic update december 2019 in November 2016) to one with the lowest levels prices. Moreover, Cyclone Idai’s overall impact in 2019. Mozambique’s USD exchange rate, an on inflation so far has been modest and mostly important determinant of inflation, has remained localized. Beira, the area most affected, saw food broadly stable, having traded at an average of 61 inflation reach 10.3 percent in April this year as to the US dollar since mid-2017, contributing to agricultural output suffered, but with a weight lower inflation. But other factors are also affecting of just 18.6 percent in national CPI and limited the price setting, including a combination of weak integration amongst Mozambique’s agricultural demand and recent downward revisions of fuel markets, its overall impact on inflation was muted. Figure 9: Lower food price pressures have contributed to an easing in overall inflation… Contributions to inflation (%) and USD/ MZN exchange rate, 2016 - 19 30% 80 75 25% 70 20% 65 15% 60 55 10% 50 5% 45 40 0% 35 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 -5% 30 Other non-food items Food items Electricity, gas and fuel Transport Inflation - Mozambique Inflation - Beira MZN/USD, RHS Source: INE. The External Sector Commodity export performance in 2019 has been lackluster with lower prices for some of Mozambique’s current account deficit Mozambique’s largest commodities. Goods (excluding capital gains receipts) is exports are expected to decline by 14 percent expected to keep steady in 2019 as export in 2019. Coal and aluminum, which together performance flags and megaproject accounted for approximately 60 percent of imports decline. exports in 2017 and 2018, experienced significant reductions in their prices in 2019 which has affected The current account deficit (CAD), excluding overall export receipts (Figure 13). Coal prices at the capital gains receipts, is expected to remain end of November 2019 were 33 percent lower stable at around 31 percent of GDP in 2019 than at the end of 2018 whilst aluminum prices fell (reducing to 25 percent of GDP with capital by 8 percent during the same period. Conversely, gains).⁷ The megaproject deficit is expected to non-megaproject exports continued to increase in narrow in 2019, despite a drop in commodity 2019, albeit at a slower growth rate. An 11 percent exports, mainly due to a significant reduction appreciation of the real exchange rate (RER) since in megaproject imports in the pre-LNG the start of 2018 may be contributing to the slower investment phase. This counteracts a wider non- growth in exports. But, with the RER being well megaproject deficit, driven mostly by growth below historical levels (Figure 10), it continues to in consumer imports (Figure 11 and Figure 12; provide a better setting for export growth as seen in Table 2). 2019 for sectors such as tobacco amongst others. ⁷ In 2019, Mozambique received USD 880 million (approximately 6 percent of GDP) in capital gains receipts from the sale of assets in the LNG industry. 10 part one: recent economic developments Figure 10: The recent real exchange appreciation may be contributing to slower non-extractive export growth Real effective exchange rate index (2010 = 100) and Exports (USD millions), 2011 – 19 190 300 170 150 250 130 200 110 90 150 70 50 100 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Real effective exchange rate, LHS Exports excl. coal and aluminum (3 month moving avg), RHS Source: World Bank staff estimates based on BdM and INE data. Bolstered by strong investment inflows, A softer global growth setting and falling the external position remains adequate commodity prices present a less favorable despite a growing current account deficit. external outlook. As in previous years, the current account deficit Lower growth, globally and for key trading was largely financed by foreign direct investment partners, and falling commodity prices continue and, increasingly, by LNG project financing. FDI to be a source of external risk for Mozambique inflows continue to be the main source of external (Table 3). Global growth has been revised financing and are well above sub-Saharan Africa downward from 2.9 percent to 2.6 percent, or low-income country averages (Figure 14), reflecting weaker than expected international accounting for 64 percent of the CAD in 2019. trade and investment at the start of the year,⁸ thus Private external debt to finance the LNG investment suggesting a sluggish outlook especially outside program is also increasingly financing the deficit. the extractive sector. Weakening commodity Non-megaproject FDI has also expanded in prices continue to be a cause for concern for 2019, bolstered by a large one-off investment for Mozambique’s key exports. Coal prices fell 42 ports and logistics in the Nacala Corridor whilst percent in the third quarter of 2019 (compared investment levels in other sectors remain muted to the same period last year) following already amidst a still weakened economic setting. steep declines in the second half of 2018 and could weaken further if slower growth in China With the significant increase in external inflows, weakens demand.⁹ The consequences of the gross international reserves are expected geopolitical tensions in the Middle-East, and in to reach approximately USD 3.7 billion by particular fears of rising oil prices, may also create end 2019, covering around 6 months of added risk for the outlook. imports (excluding megaprojects). This places Mozambique’s reserves at an adequate level and Moreover, large forex inflows in the medium increases capacity to cushion potential external to long-term are an opportunity to bolster and domestic shocks. Mozambique’s external buffers but are also an additional source of risk if not well managed. ⁸ World Bank Global Economic Prospects, June 2019. ⁹ Risks are skewed to the downside and include weaker global growth and environmental policies aimed at reducing air pollution – particularly in China, which accounts for 11 percent of global demand. 11 mozambique economic update december 2019 Mozambique is set to receive a significant influx would erode Mozambique’s competitiveness on of foreign currency – initially to fund post-cyclone the global market and place further pressures reconstruction efforts and to finance LNG projects on the current account deficit. In this context, then, towards the end of upcoming decade, resource inflows are an opportunity provided as natural resource revenues. If not managed that policy makers prioritize structural reforms, well, this influx could result in a significant implement strategic investments well and increase strengthening of the local currency, which institutional capacity to counteract risks. Figure 11: The CAD (excluding capital gains) is Figure 12: …as lower import levels set to remain stable in 2019… Current Account Balance (USD millions), 2011-19 Goods and Service imports (USD million), 2011-19 1,000 0% 15,000 - (1,000) -20% 10,000 (2,000) (3,000) (4,000) -40% 5,000 (5,000) (6,000) (7,000) -60% 0 2011 2012 2013 2014 2015 2016 2017 2018 2019f 2011 2012 2013 2014 2015 2016 2017 2018 2019f Megaproject Non-megaproject Overall CAB Overall CAB (excl. capital gains) Megaproject Non-megaproject Total imports Source: BdM; World Bank staff estimates. Source: BdM; World Bank staff estimates. Figure 13: … offset a drop in commodity exports Figure 14: High FDI levels continue to support the external position Exports (USD million) and price index (2005 = 100) of key goods, 2016-19 Net foreign direct investment (% of GDP), 2012-19 3,500 250 40% 3,000 35% 200 30% 2,500 150 25% 2,000 20% 1,500 100 15% 1,000 10% 50 500 5% - - 0% 2015 2016 2017 2018 2019f 2012 2013 2014 2015 2016 2017 2018 2019f Coal exports Aluminum exports Mozambique SSA LIC Coal (Australia USD/mt), RHS Aluminum (USD/mt), RHS Source: BdM; World Bank staff estimates. Source: BdM, WDI. 12 part one: recent economic developments Table 2: The Balance of Payments (USD millions, unless 2016 2017 2018 2019 ∆ ∆ ∆ otherwise stated) Actual Actual Estimate Forecast 16/17 17/18 18/19 Current Account Balance (% of GDP) -32.0 -19.6 -30.6 -25.1 … … … Megaproject -3.4 8.0 -4.6 -2.4 … … … Non-megaproject -28.6 -27.6 -26.0 -22.8 … … … Current Account Balance (% of GDP), excl. capital gains -32.0 -22.2 -30.6 -31.0 … … … Megaproject -3.4 8.0 -4.6 -2.4 … … … Non-megaproject -28.5 -30.2 -26.0 -28.6 … … … Current Account Balance -3,846 -2,586 -4,502 -3,792 -33% 74% -16% Trade Balance -4,106 -2,830 -4,544 -4,642 -31% 61% 2% Goods, net -1,405 -498 -973 -2,007 -65% 95% 106% Exports 3,328 4,725 5,196 4,472 42% 10% -14% Megaproject 2,413 3,657 3,913 3,045 52% 7% -22% Non-megaproject 915 1,068 1,282 1,426 17% 20% 11% Imports 4,733 5,223 6,169 6,478 10% 18% 5% Megaproject 771 733 1,277 1,206 -5% 74% -6% Non-megaproject 3,962 4,490 4,892 5,272 13% 9% 8% Services, net -2,701 -2,332 -3,571 -2,636 -14% 53% -26% Income and transfers, net 260 244 42 851 -6% -83% 1906% Capital & Financial Account 3,383 3,838 4,220 4,256 13% 10% 1% of which FDI, net 3,093 2,293 2,692 2,428 -26% 17% -10% Megaproject 1,322 911 2,013 972 -31% 121% -52% Non-megaproject 1,771 1,382 679 1,456 -22% -51% 114% Other, net (1) 83 1,342 1,363 1,676 1520% 2% 23% Overall Balance -463 1,253 -282 465 … … … excl. capital gains & -463 903 -282 -415 … … support for cyclones Source: BdM, World Bank staff estimates. Notes: A positive growth rate for the Current, trade and goods balances indicates a wider deficit. (1) Other flows include net portfolio investment; net currency and deposits; loans; insurance, pensions and standardized guarantee schemes (net); net trade credits and advances; net other accounts payable/receivable. 13 mozambique economic update december 2019 Table 3: External outlook 2018 2019p 2020p 2021p Nominal Commodity Price Aluminum USD/mt 2,108 1,790 1,760 1,800 Coal, Australia USD/mt 107 79.0 71.0 69.8 Hard coking coal, Australia USD/t 194 184 162 157 Liquefied Natural Gas, Japan USD/mmbtu 10.7 10.7 10.0 9.8 Tobacco USD/mt 4,863 4,750 4,727 4,704 Current Account Deficit, % of GDP -30.6 -25.1 -39.6 -56.0 Financial and Capital Account, % of GDP 28.7 28.2 38.6 56.6 Net Foreign Direct Investment, % of GDP 18.3 16.1 22.0 28.8 Source: World Bank staff estimates, Thomson Research, KPMG Analysis; p = Projection. Fiscal Policy But recovery efforts following the tropical Having made progress in consolidating cyclones, election related costs and a growing public finances, costs associated with the wage bill added spending pressures in 2019 cyclone response and electoral spending, and are expected to push the primary deficit along with a still growing wage bill have to 3.3 percent of GDP (excluding capital gains reverted this trend in 2019. receipts). Immediate relief efforts and repair of critical infrastructures have contributed to put the With a reduction in the primary deficit from expected capital budget for 2019 at 7.7 percent almost 6 percent in 2015 to 1.5 percent by of GDP. The other main source of pressure, 2018, Mozambique made significant progress which has persisted in recent years, stems from in remedying its fiscal imbalances.¹⁰ The growing civil services salary costs, which have overall fiscal deficit also narrowed from 7.1 to been steadily increasing from 10 percent GDP in 5.1 percent of GDP (Figure 15). While revenues 2015 to an estimated 12 percent of GDP in 2019. (excluding capital gains) did experience slight It was therefore fortunate that Mozambique growth (0.8 percentage points of GDP), most collected US$ 880 million in capital gains tax, of the consolidation effort took place on the equivalent to 6 percent of GDP, from the sale of expenditure side where total spending fell from assets between LNG operators this year. These 33 to 31 percent of GDP during this period. much-needed funds will cushion these spending Considerable advances were also achieved on needs, support the authorities in continuing key reforms to strengthen fiscal management, supplier arrears clearance and provide a buffer in including better regulation of debt and guarantee the form of savings. It also brings the primary and management, an improved legal framework for overall balances (including capital gains taxes - managing state-owned enterprises and improved CGT) to an estimated 2.5 and -1.4 percent of public investment management procedures. The GDP in 2019, respectively. authorities have also cleared most of the validated arrears which amounted to 2 percent of GDP in Spending on investment, social and 2018.¹¹ About 59 percent of these arrears were economic sectors: improving in a repaid in 2018 and 2019, and an additional 26 challenging financing environment. percent were settled through issuance of treasury bonds in the first half of 2019. The authorities have continued to make 10 The primary balance is equivalent to the overall fiscal balance less interest payments. 11 In 2018 the government validated a total of MZN 13.5 billion arrears that have been accumulated since 2015. An additional MZN 6 billion of estimated arrears are still being analyze. 14 part one: recent economic developments efforts to bolster priority spending on social metical during this period, as well as a significant and economic sectors.12 After remaining steady reduction in external borrowing (Figure 17). at 14 percent of GDP since 2016, spending on External debt ratios are lower when the debt priority sectors went up by a percentage point of of the Empresa Nacional de Hidrocarbonetos GDP to 15 percent in 2018, reflecting an increase (ENH)13 is excluded, declining from 95 to in the investment budget for the health and 85 percent of GDP between 2016 and 2019, infrastructure sectors (Figure 16). Safeguarding of reflecting the contribution Mozambique’s LNG priority spending has also been helped by directing financing to the debt stock.14 Similarly, public a share of the capital gains windfall received in sector debt (excluding ENH) dropped from 118 2017 towards rehabilitation of road infrastructure to 104 percent of GDP over the same period. and the conclusion of several social projects. Yet, Yet, debt service obligations have continued to overall, the burden of the fiscal adjustment since be elevated with the external and public debt 2016 has fallen disproportionately on a category service to revenue and grants ratios estimated of expenditure that is important for future to reach 16 and 34 percent, respectively, at end growth: public investment. A significant share 2019 (excluding capital gains tax). of the fiscal adjustment to date relied on cuts to the investment budget with capital spending With domestic credit growing as a source having declined from 12 to 7.7 percent of GDP of financing, the stock of domestic debt between 2015 and 2018, which if continued, has continued to grow. Central government would result in reduced progress in access to domestic debt picked up by MZN 32 billion in basic infrastructure. the first 9 months of 2019 (around 3.4 percent of GDP) to meet budget financing needs, advance Spending on social and economic sectors is with domestic arrears clearance and to support set to increase further in 2019 but efficiency ailing SOEs. These needs brought the stock of spending remains a challenge. At MZN 96 of central government domestic debt to 18.2 billion, total priority spending in the first 9 months percent of GDP by the end of September 2019, of the year was 11 percent higher than the same up from 11.7 percent at end 2016. This increase, period last year, driven by recurrent spending which has taken place during a period of high in education and health and infrastructure interest rates, has raised the domestic debt (in particular energy, public works and water) service burden to an estimated 2.2 percent of sectors. This trend, along with the additional GDP in 2019, up from 1 percent in 2016. Looking spending linked to cyclone recovery efforts, ahead, the maturity profile of these financing suggests that priority spending could increase sources is contributing to considerable levels of to 16.5 percent of GDP this year. Despite this, debt-service concentration: roughly 80 percent efficiency of spending and the growing regional of the stock of treasury bonds as at June 2019, inequality remain a challenge in Mozambique, estimated at 5 percent of GDP (equivalent to half especially in key service delivery sectors. See of the domestic debt stock), is due between 2019 section two of this report for a more detailed and 2022, raising rollover risk in the medium- discussion this topic. term (figure 18). Although Mozambique remains in debt The authorities are have made progress in distress, there has been progress in resolving the MOZAM bond default. The improving the external debt profile. authorities concluded negotiations of the US$ 727 million MOZAM 2023 bondholders in late Although still elevated, debt levels are have 2019, resulting in a swap to a US$ 900 million declined since 2016. Public sector external bond. Under the agreement, the maturity has debt is estimated to have narrowed from 103 been extended from 2023 to 2031, and the to 98 percent of GDP between 2016 and 2019 annual coupon rate has been reduced from on account of a 13 percent appreciation of the 10.5 to 5 percent until 2023 and 9 percent from 12 Mozambique’s development plans consider as priority sectors education, health, infrastructures, agriculture, and social welfare. 13 Mozambique’s national hydrocarbons company. 14 IMF-World Bank Debt Sustainability Analysis (DSA) for Mozambique (2019) with GDP estimates for 2018 and 2019 updated. 15 mozambique economic update december 2019 2023 onward. A US$ 40 million consent fee to of time, given current debt levels. As such, bondholders is also included.15 The restructuring a persistent focus on increased efficiency primarily offers cashflow relief. The resulting in expenditure, tackling the sources of fiscal adjustment in Mozambique’s debt profile will risk and continued improvements in revenue bring needed fiscal respite and could contribute management are essential in the coming year to repairing the country’s credit rating over a to bring financing down whilst meeting national period of time.16 In the meantime, the authorities development needs. With significant progress took steps to legally challenge the Proindicus having been made with subsidy reforms in linked debt and to advance negotiations with the recent years, measures to control the civil creditors of the Mozambique Asset Management service remuneration and to restructure loss- (MAM) linked debts.¹⁷ Nevertheless, the most making SOEs are critical. recent debt sustainability analysis indicates that Mozambique will remain at a high risk of This is the right time to strengthen medium- debt distress in the medium term even under term fiscal planning, both to navigate through the scenario that both the MOZAM and MAM the current fiscal context but also to establish debts are restructured, and the Proindicus debt the framework for judiciously managing future is excluded from the public debt stock. This resource inflows. If not managed well, an LNG underlines the necessity of continued fiscal linked revenue boom would be a significant source restraint and pro-active fiscal risk management of risk to macroeconomic stability. Managing in the medium-term.18 these risks requires a battery of policies and instruments including a credible medium- The fiscal outlook remains concerning and term fiscal framework anchored in appropriate requires near term measures to strengthen fiscal targets and a sovereign fund for saving medium-term fiscal management. and smoothing volatility. Similarly, borrowing decisions should be guided by a medium-term The outlook points to a tight fiscal setting debt strategy anchored in sustainable debt and the need to reign in the public sector’s objectives. Moreover, public investments would financing needs whilst raising the efficiency of be more impactful if sourced from a pipeline of expenditures, especially for service delivery and well-prepared projected that have been appraised infrastructure sectors. Mozambique expects a from economic and social impact perspectives. significant expansion in fiscal space with the start Improved reporting and fiscal and monetary policy of LNG production. But these prospects require coordination are also essential. Mozambique time to materialize. Given project development has made progress in some of these areas and, and production flow timelines, a significant with additional efforts, can establish a solid increase in fiscal revenues could potentially medium-term fiscal management framework be 8-10 years away. This places Mozambique and the right conditions for managing any future in a tight fiscal setting for an extended period resource boom. 15 http://www.mef.gov.mz/index.php/documentos/anuncios-e-comunicados/684-mozambique-reaches-an-agreement-in- principle-on-the-key-commercial-terms-of-a-proposed-restructuring-transaction-relating-to-mozambiques-usd-726524000- 10-5-per-cent-notes-due-2023 16 Having downgraded Mozambique from B2 in August 2015 to CAA3 in July 2016, Moody’s upgraded Mozambique’s sovereign debt rating by one notch, to Caa2, in September 2019. Similarly, adjustments to Mozambique’s sovereign credit ratings have also been carried out by Fitch (from RD to CCC) and Standard & Poor (from SD to CCC+) in November 2019. 17 The Proindicus and MAM credits are part of the hidden debts package, and amount to US$ 622 million and US$ 535 million, respectively. 18 The IMF-Word Bank 2019 DSA for Mozambique shows that, despite improvements compared to baseline scenario, under no hidden debt scenario present value of debt to GDP and debt service to revenue indicators would still breach their respective thresholds. 16 part one: recent economic developments Figure 15: Progress in fiscal adjustment has Figure 16: Spending on priority sectors is set to pick been reverted in 2019 up in 2019 reflecting higher capital expenditures Fiscal balances (% of GDP), 2015 - 19 Spending on priority sectors (MZN million, % of GDP), 2015 - 19 2015 2016 2017 2018 2019f 180,000 17% 0% 160,000 -1% 140,000 16% -2% 120,000 100,000 15% -3% -4% 80,000 14% -5% 60,000 40,000 13% -6% 20,000 -7% - 12% -8% 2015 2016 2017 2018 2019f Primary balance (excluding capital gains tax) Recurrent Investment Overall balance (excluding capital gains tax) Total (% of GDP), RHS Source: MEF; IMF; World Bank staff estimates. Source: MEF; World Bank staff estimates. Figure 17: Currency appreciation has helped to Figure 18: …but domestic debt pressures are bring total debt down… growing Public sector debt (% of GDP), 2014 - 18 Estimated bond amortization profile (MZN million, % of GDP, % of Revenue), 2019 - 2032 150% 25,000 9% 8% 20,000 7% 100% 6% 15,000 5% 50 4% 10,000 3% 5,000 2% 0% 1% 2014 2015 2016 2017 2018 - 0% Public sector domestic debt (incl. guarantees) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 IMF External Arrears Government external guaranteed debt General government external debt Amount due % of GDP, RHS % of Revenue, RHS Source: 2019 DSA. Source: World Bank staff estimates based on BVM. 17 mozambique economic update december 2019 Table 4: Government Finances (commitment basis) (In percent of GDP) 2015 2016 2017 2018 2019 Actual Actual Actual Estimate Forecast (1) Revenue and Grants (excl CGT) 26.0 23.9 24.6 26.0 24.8 Total Revenue 23.2 22.0 25.1 24.0 29.3 Tax Revenues 19.5 18.4 20.0 20.7 25.9 of which capital gains 2.5 5.8 Non-Tax Revenue 3.7 3.6 5.1 3.3 2.8 (Incl. capital revenue) Grants 2.8 1.9 1.9 2.0 1.3 Total Expenditure & Net Lending 33.1 30.6 30.3 31.1 32.0 Current Expenditure 20.0 19.2 19.4 21.3 22.5 of which: Compensation to employees 10.0 10.4 10.6 11.5 11.9 Interest on public debt 1.2 2.5 3.0 3.6 3.8 of which arrears (2) 0.5 1.5 1.0 0.1 Capital Expenditure 12.0 8.1 6.7 7.7 7.6 Domestically financed 5.3 3.2 3.2 3.2 4.4 Externally financed 6.7 4.9 3.5 4.5 3.2 Unallocated expenditure 0.0 0.4 0.9 0.6 Supplier arrears (3) 0.5 1.2 0.3 0.3 1.0 Net Lending 0.7 1.8 3.0 1.1 0.8 Primary Balance -5.9 -4.3 -0.3 -1.5 2.5 Overall Balance -7.1 -6.7 -3.3 -5.1 -1.4 Primary Balance (excluding -5.9 -4.3 -2.8 -1.5 -3.3 capital gains tax) Overall Balance (excluding -7.1 -6.7 -5.7 -5.1 -7.2 capital gains tax) Overall Financing 7.1 6.7 5.7 5.1 7.2 External Financing 4.0 3.9 6.8 3.3 0.6 Exceptional External 0.0 1.8 4.0 3.2 0.1 financing - debt Domestic Financing 3.2 2.9 -1.1 1.8 6.6 Exceptional financing 0.0 1.2 2.8 0.9 4.4 (suppliers & CGT) Total Debt (Public and 87.4 125.6 105.6 109.0 117.3 Publicly Guaranteed) External 76.5 103 86.5 90.0 98.2 Domestic 10.9 22.5 19.1 18.9 19.1 GDP (nominal, MZN millions) (4) 637,760 752,702 840,526 887,806 943,582 Source: MEF; Mozambique DSA, World Bank staff estimates. (1) Forecast includes added election and cyclone recovery costs, as well as impact on revenue. US$ 118 million RCF is also included. (2) And (3) are estimated on a commitment basis. (4) Real GDP rebasing from 2009 to 2014 resulted in new GDP figures with impact on the fiscal indicators. The changes were more pronounced for 2015 and 2016 figures with nominal GPD increasing by 8 and 10 percent, respectively. 18 part one: recent economic developments Monetary Policy remains considerable potentially crowding out the private sector’s access to affordable credit, Monetary policy has continued to gradually Mozambique’s commercial rates continue to ease, but the policy stance remains tight be amongst the highest on the continent and and credit growth is weak in a fragile credit growth continues to be minimal (Figure economic context. 21 and Figure 22). Low inflation set the stage for continued Non-performing loans and exposure to the policy rate cuts in 2019. The interbank public sector are key risks to an otherwise reference lending rate (MIMO)¹⁹ dropped by positive setting for the banking sector. 150 basis points to reach 12.75 percent by the end of 2019. Similarly, the reference lending Bank exposure to public sector risk remains rate (FPC)²⁰ dropped by the same amount elevated. The rise in non-performing loans (NPLs) during the course of 2019 and stood at 15.75 and exposure of banks to underperforming state- percent as inflationary pressures continued to owned enterprises remain key vulnerabilities to ease (Figure 19). The easing cycle has been the banking sector. NPLs rose from 8.4 percent appropriately cautious in view of external price of gross loans in 2017 to 12 percent in April 2019, risks and concerns around the rate of fiscal before falling to 9.8 percent in October 2019. adjustment. But Mozambique has one of the Credit performance has also remained poor, with highest policy rates in the region, and with local second quarter 2019 prudential indicators on NPLs and foreign currency reserve requirements at 13 ranging between 2 and 19 percent for the largest and 36 percent, the policy stance remains tight banks. Exposure to the government, through (Figure 20). Given the weak economic setting, securities and direct lending (including SOEs), continued price stability and bringing the fiscal remains elevated: exposure amongst the largest adjustment back on track could create the banks represented approximately 40 percent of conditions for further monetary policy easing total credit in June 2019. In this context, robust in 2020. financial safety nets, including deposit insurance and resolution frameworks, are essential to increase Commercial bank rates have slowly adjusted confidence in the system, protect depositors, and downwards, supporting a gradual recovery in promote sound competition. credit. Banking sector interest rates averaged 21 percent in the first 6 months of 2019, 30 percent But other key banking indicators are relatively lower than the same period last year whilst the positive. Average banking sector liquidity average retail rate for well-qualified borrowers remains high. In October 2019, the liquid asset narrowed to 18.5 percent in August 2019 (from ratio was 38 percent (relative 32 percent on 21.8 a year earlier). This has supported the average for SSA countries). Profitability declined demand for credit, which started to register slightly reflecting the deterioration in asset growth in real terms in September. However, quality. Return on assets and on equity, stood the spread between the commercial and the at 3.1 percent and 26.2 percent in October policy rates has started to pick up suggesting 2019, compared to 3.1 percent and 29.8 percent slowing policy rate transmission. Between respectively at the end of 2018. Returns have March and September 2019, the deviation of the been supported mostly by high interest rates, average commercial banks rate from the lending including income from Government securities, facility rate and from the MIMO increased by as well as fees and commissions. Capital 250 and 200 basis points to 5.5 and 8 percent, market performance has also improved with respectively. In this context, and in a setting the listing of new debt and equity instruments where the public sector’s demand for credit on Mozambique’s Stock Exchange. ¹⁹ Interbank Money Market Rate. ²⁰ Facilidade Permanente de Cedência. 19 mozambique economic update december 2019 Figure 19: Inflation easing has set the stage for Figure 20: … whilst FX reserves requirement further policy rate cuts but at a gradual pace… increased during the year Policy interest rates and CPI (12-month % change), FX reserve requirement and nominal exchange rate, 2016-19 2015 – 2019 30% 40% 35% 25% 30% 20% 25% 15% 20% 10% 15% 10% 5% 5% 0% 0% Jan/16 May/16 Sep/16 Jan/17 May/17 Sep/17 Jan/18 May/18 Sep/18 Jan/19 May/19 Sep/19 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 12 month inflation rate Prime rate Reserve requirement local currency Standing credit facility rate MIMO Reserve requirement foreign currency Source: BdM; INE. Source: BdM. Figure 21: …but interest rates remain amongst Figure 22: …which has contributed to dampened the highest on the continent credit growth CPI adjusted policy and commercial interest rates (%), Credit growth (12 month % change), 2015-19 June 2019 20% 40% 18% 30% 16% 14% 20% 12% 10% 10% 8% 0% 6% -10% 4% 2% -20% 0% -30% Angola Ghana Uganda Malawi Rwanda Kenya Namibia Botswana Nigeria South Africa Mozambique Lesotho Swaziland Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Credit in foreign currency Real monetary policy rates - June 2019 Credit in domestic currency Real prime rate - June 2019 Nominal credit growth Real credit growth Source: Country Central Banks. Source: BdM; World Bank staff estimates. 20 part one: recent economic developments Progress in raising financial inclusion. The Authorities are seeking to improve access to finance by advancing insolvency reforms Access to finance is the second largest hurdle and introducing a framework for secured faced by firms in Mozambique, after corruption.21 transactions and movable collateral registration. Financial institutions in Mozambique have very The new Secured Transactions Law, approved limited access to credit risk-sharing facilities to by Parliament in November 2018, provides a unlock financing to higher risk segments. While landmark reform as it will enable businesses there are many microfinances, commercial, and to use their movable assets as collateral. It will development financing schemes available, access also make financial services such as leasing and to finance is limited by conditions that include factoring more feasible. Moreover, the Insolvency high interest rates and collateral requirements. Administrator Regulations passed in March 2019 According to the recently concluded Enterprise are intended to support more efficient debt Survey, only 10 percent of firms had a bank loan recovery processes, which may result in improved or line of credit in 2018. The figure is even lower credit conditions. The entrance of a private credit when considering MSME and firms involved in the bureau into the market in 2019 is also a positive agriculture sector, despite an overall improvement development as it will help complement existing in the levels of financial inclusion in recent years credit information systems and offer non-bank (see Box 4).22 financial information. Box 4: Strengthening financial inclusion in Mozambique: progress to date and further reforms needed Mozambique has made considerable gains wallet ownership has grown three times faster towards financial inclusion, with growth in than the rate for traditional bank accounts, with mobile wallet accounts playing a key role. the value of transactions increasing from an Notable accomplishments between 2016 average of 1 percent of GDP in 2014-16 to 19 and 2018 include the opening of over 4 percent in 2019. Strengthening of the regulatory million new accounts, the growth in mobile framework, including legislation on non-bank money transactions, the expansion of e-money issuance and regulations on the use financial access points, strengthening of the of bank agents has facilitated the emergence financial infrastructure for credit and secured of digital finance in Mozambique, whilst the transactions, and improvements in the legal GoM’s “one-district-one-bank” initiative has and regulatory framework. Since 2015, mobile improved access to financial services. Figure 23: Growth in mobile wallets has Figure 24: …but women continue to be exceeded bank accounts… underpresented Bank accounts and mobile wallets (number per 1,000 Bank accounts and mobile wallets per 1,000 men and adults), 2014 – 2018 women, 2017 - 2018 689 590 600 459 460 300 349 400 187 188 200 0 Men Women Men Women 2014 2015 2016 2017 2018 Bank accounts Mobile wallets Bank accounts Mobile wallets 2017 2016 Source: BdM. Source: BdM. 21 According to the 2018 Enterprise Survey for Mozambique. 22 Whilst MSMEs contributed to 28 percent of GDP and 42 percent of formal employment in 2015, an estimated 75 percent remain financially excluded. Similarly, agriculture, which accounts for one fifth of GDP, only benefitted from 3 percent of lending to the economy in 2018 (down from 12 percent in 2000 – 2010). 21 mozambique economic update december 2019 Despite this improvement, levels are still prosperity. With only 58 percent of the low and unevenly spread with women population having a national ID, widening and the poor being particularly excluded. the list of documents required for low-risk According to the Bank of Mozambique, an customers to open a bank account will estimated 33 percent of Mozambican adults enable further individuals to have access reported having an account in 2018. The to banking services. Introducing tiered KYC gender gap in Mozambique is high with only requirements will enable individuals who lack 19 percent of women owning an account the full range of identification documents to relative to 46 percent for men, which limits open basic bank accounts. The digitization women from being able to effectively of government payments (social protection, control their financial lives. Absence of basic pension and civil servant salary payments) by infrastructure (roads, electricity, telecoms, linking these to mobile wallets will eliminate etc) in rural areas is a hinderance, along cash payments, promote greater flexibility in with low customer awareness of financial individuals’ access to their money and reduce services’ benefits, limited acceptance distance to banking services (thus reducing of digital payments by merchants and public servants’ absenteeism). Ensuring full challenging liquidity management. interoperability between banks and e-money issuers is equally important as it will improve Additional reforms are needed to ensure the efficiency of the retail payment system financial inclusion can be a key enabler for and allows for greater penetration of mobile poverty reduction and increased shared wallets – particularly in rural areas. Source: Mozambique National Financial Inclusion Strategy Medium-term review, 2019. 22 part two: mind the rural investment gap Part Two: Mind the Rural Investment Gap In a context of reduced growth, diminished Mozambique is a country with large fiscal space and heightened exposure to infrastructure gaps. Years of conflict before natural disasters, meeting the basic needs of the peace was widely established in the early 90s growing population and tackling the country’s left Mozambique with a low stock of physical massive infrastructure gap is an immense capital and low rates of access to basic challenge. Drawing on the recent World Bank infrastructure and services across the country. “Mind the Rural Investment Gap” report,23 this As Mozambique set out to recover and to build section of the Mozambique Economic Update its economy, its infrastructure and institutions, discusses the population’s level of access to significant progress was made from a very low basic infrastructure and the role of the public base. Yet, the infrastructure gap remains large investment program in increasing it. The report and demands from a growing population and looks backwards to measure disparities in access elevated exposure to natural disasters increase and to assess whether the public investment the magnitude of the challenge. Today, program was effective in remedying them, in Mozambique ranks below regional peers on order to identify future improvements needed to reorient the investment program. The analysis finds that overall, disparities in access to basic Figure 25: Mozambique has a large infrastructure gap infrastructure have been growing between Quality of infrastructure; 2007 - 17 rural and urban areas, especially the rural parts of Mozambique’s central and northern 3.0 provinces. The analysis also finds that the 2.8 public investment program invested at lower 2.6 levels in the most underserved areas during the 2.4 investment boom years, thus contributing to the 2.2 disparities. Instead, it maintained a significant 2.0 focus on urban investments and channeled considerable resources to non-capital outlays 1.8 such as administrative spending. The report 1.6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 concludes by recommending measures to reorient investment planning towards closing Mozambique Sub-Saharan Africa median the access gap to promote both growth and equality of opportunity for all Mozambicans. Source: World Economic Forum Global Competitiveness Index.²⁴ 23 https://hubs.worldbank.org/docs/imagebank/pages/docprofile.aspx?nodeid=31202216 24 Roads, rail, ports and air transport. 23 mozambique economic update december 2019 access and quality of infrastructure measures Leading and lagging areas. (Figure 25). Given this context, narrowing the infrastructure gap has been identified as a policy First, the evidence shows significant regional priority by the Government of Mozambique.25 disparities in access, marking Mozambique’s central and northern regions as the areas with A Growing Gap in Access lowest levels of coverage. As shown in Figure to Basic Infrastructure. 26 and Figure 27, households in Maputo and Gaza have the highest levels of access to basic What is the state of access to basic infrastructure? infrastructure. These two leading provinces Have access levels across Mozambique improved? maintained their position at the top and further To answer these questions, we construct an improved access levels between 2009 and index that provides a snapshot of access to 2015. The two most lagging provinces, Tete basic infrastructure (improved water source, and Zambezia consistently remained at the electricity, roads, markets, primary schools and bottom of the scale. However, some areas health facilities), by province, using data from caught up whilst others fell behind. Inhambane the Inquérito sobre Orcamento Familiar (IOF) and Manica, which were lagging provinces in household surveys, information about the physical 2009 caught up to be amongst the leading stock of infrastructure26 and other sources such as areas in 2015, whereas four provinces dropped night-time lights data (see Box 5). This index can in the index: Nampula, Sofala, Cabo Delgado be interpreted as showing the average rank of the and Niassa. These four provinces, along with province in access to basic infrastructure, relative to Zambezia (the most lagging province) have the others, allowing comparison to identify leading and highest percentages of the population below lagging areas in a given period. the poverty line in the country. Figure 26: Regional disparities in access Figure 27: …and largely mirror the country’s are evident poverty trends Access to basic infrastructure and population growth 2009-15 Access to basic infrastructure and poverty reduction 1 Bubble size = population 1 Bubble size = % below the Maputo Maputo 0.9 increase 2007-2017 City 0.9 poverty line in 2014/15 Maputo City Maputo 0.8 0.8 0.7 0.7 Gaza Gaza Access 2015 Access 2015 0.6 Manica 0.6 Manica 0.5 Sofala 0.5 Inhambane Sofala Inhambane Cabo Delgado Cabo Delgado 0.4 Niassa 0.4 Niassa 0.3 Tete 0.3 Tete Nampula Zambezia Nampula 0.2 Zambezia 0.2 0.1 0.1 0 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Access 2009 Access 2009 Source: World Bank staff estimates based on IOF. Source: World Bank staff estimates based on IOF. Leading and lagging sectors. water, which at 27 and 26 percent of households on average remains low, has increased in all Second, beneath the regional trends is a provinces between 2009 and 2015. Similarly, mixed performance at the sectoral level, with access to health infrastructure, as measured by improvements in access to water, electricity the distance of households to the nearest clinic, and health facilities. Access to electricity and increased at the national level and is the only 25 Estratégia Nacional de Desenvolvimento 2015 -2035; Programa Quinquenal do Governo 2015 -2019. 26 This database was developed by the World Bank disaster risk management group to measure exposure and impact of natural disasters. 24 part two: mind the rural investment gap indicator to show faster progress at the rural sectors with the exception of health and level than in urban areas. In these three sectors, water, and a marked worsening in rural even though overall access levels remain low, connectivity. Disaggregating the sectoral investment has helped to improve the supply of trends between rural and urban areas shows infrastructure in most areas. that most of the deterioration in access observed in the underperforming sectors However, access to transport deteriorated (transport, markets and schools) occurred in significantly, along with a moderate the rural parts of Mozambique. These trends deterioration in access to primary schools, on suggest a significant deterioration in rural average. The deterioration in access to transport connectivity and rural access to markets between 2009 and 2015 is particularly notable. since 2009. Distances to the nearest primary This indicator, which is a proxy for access to school also increased in rural areas from roads, shows the largest deterioration as distance 24 to 43 minutes on average (the increase to transport tripled. Average distance to transport is highest in Nampula and Sofala), whilst in urban areas increased slightly from 19 to 26 urban access remained relatively stable (a 3 minutes, whereas in rural areas, it increased from minute increase).27 As for electricity, access 28 to 92 minutes. Similar trends are observed for in rural zones increased slightly (from 1 to 7 the access to market indicators. percent) but remains very low. In contrast, health and water have been able to narrow A growing rural access gap. the gap, with health having almost eliminated it altogether: average distance to the nearest Third, the indicators show a widening gap clinic is around 30 minutes in both rural and between rural and urban areas across all urban areas. Box 5: The access to basic infrastructure index In order to portray progress in access to basic infrastructure, we compute an index that aggregates information about the level of household access to water, electricity, roads, markets, primary schools and health facilities at the provincial level using household survey data information. Equal weights are applied. Using these indicators, the provinces can be ranked in terms of their relative performance as follows: Suppose x(m,n) is sectoral indicator m for province n with a total of M indicators and N provinces. A provincial ranking is established for each indicator: each indicator is ranked over the N provinces to provide: r(m,n) = rank[x(m,n)] which takes the value 1 for the lowest performance and N for the highest performance. The sectoral rankings are averaged to establish an aggregate index. As such, the index for province n is defined as: I(n) = (1/(NM)) Σm r(m,n). With this ranking based approach, the index can be interpreted as showing the position of 27 Mozambique has made significant progress in increasing lower primary school enrollment in recent years (97 percent net enrollment in 2016), whilst upper primary lags behind (23 percent net enrollment). The number of students estimated to be attending pre-primary programs is just 4 percent (World Bank, 2016). The increased distance to primary schools could reflect a longer commute to schools by enrolled students and/ or the slower progress in upper primary enrollment, especially in Nampula and Sofala – the two provinces with the most pronounced increase in distance to primary schools. 25 mozambique economic update december 2019 each province in relative terms in a given period. It shows the average rank of the province relative to others, with the maximum value (or the performance frontier) being the position of the best performing province. This approach allows us to compare Mozambique’s provinces to identify leading and lagging areas across multiple dimensions in a given period (year). It does not allow for the comparison of progress against a non-observed frontier, e.g. a minimum expected level of access that exceeds the level attained by the best performing province. Did the Public Investment Only 42 percent of the investment budget went to capital expenditure on Program Contribute to the basic infrastructure31 for service delivery Growing Disparities between 2009 and 2015. in Access? Approximately one third of the investment The public investment program has a central budget was used for recurrent spending role in ensuring access to basic infrastructure between 2009 and 2015, and the remaining for service delivery. A number of factors can two thirds for capital expenditure. Recurrent affect the rate of progress in reducing access spending included spending on personnel gaps, such as the initial conditions, the rate of and non-durable goods and services. As such, population growth in the area, deterioration in only 64 percent of the investment budget may the existing stock of infrastructure and exposure have contributed to gross capital formation to damage from floods and severe storms. But (henceforth termed the capital expenditure). the main instrument in hand for policy makers Although it is not unexpected for capital in tackling these issues is the public investment projects to contain some overhead costs, the system and the levels of investment it provides significant volume of non-capital spending in to underserved areas. Yet, as the rural access the investment budget indicates weak budgeting to investment gap grew, Mozambique was and classification practices. experiencing a public investment acceleration. At an average of 13 percent of GDP, Mozambique Of the capital spend, public administration was sustained a high level of on-budget public the largest spending category between 2009 investment relative to its peers between 2009 and 2015, taking up 35 percent of expenditure, and 2015,28 placing it as one of the African followed by roads at 25 percent. Most of the economies with the highest rates of public capital spending under the “public administration” investment over this period. An increase in both category was allocated to outlays that do not government and donor flows pushed investment contribute to the accumulation of service up to this level.29 So, was Mozambique’s public delivery related infrastructure such as housing, investment program effective in reversing office furnishings, vehicles and transfers to other the emerging dichotomies in access to basic public agencies for administrative expenses. infrastructure?30 Although these may be considered important 28 It is important to mention that off-budget investment is a significant share of total investment in Mozambique. For instance, an analysis of the off-budget capital investment executed by ten of the largest SOEs shows that public investment delivered through these entities was equivalent to 6 percent of GDP on average, between 2014 and 2015. Besides SOEs, municipalities, donor projects, non-governmental organizations, municipalities and private sector also play an important role in the provision of basic infrastructure. 29 In fact, although donor funded capital projects were significant , the government’s own resources (including budget support) were the main source of growth (explaining 78 percent of the investment growth), indicating a policy stance in favor of increased public investment. 30 The analysis in this section covers on-budget donor investment due to the absence of information/ updated database on off-budget spending. Off-budget donor support is considerable in some sectors, notably health where off-budget donor financing was between one-third and one-half of the annual spend over the past decade (UNICEF, 2017). 31 Mainly roads, water and sanitation, health, education, agriculture and environment. 26 part two: mind the rural investment gap costs for the upkeep of the public sector, their budget, the composition of the capital direct contribution to increasing access to basic budget improved. Sharp cuts to the services and raising the productive capacity of investment budget were made as part of the economy is limited. As shown in Figure Mozambique’s fiscal consolidation efforts 28, roads accounted for 25 percent of capital from 2016 onwards, when an economic spending. Other key areas such as education, crisis necessitated deep fiscal and monetary water, health and agriculture accounted for adjustment programs. With these cuts, a smaller share of spending (10, 7, 5 and 4 investment expenditure dropped from 12 to 8 percent respectively). Therefore, after deducting percent of GDP between 2015 and 2018. With recurrent spending and administration expenses this, the capital budget began shedding public from the investment budget, just 42 percent administration spending, recurrent investment of Mozambique’s on-budget investment was spending dropped slightly from 4 to 3 percent allocated to capital formation in key economic of GDP in 2017 whilst capital expenditure and social sectors between 2009 and 2015. dropped at a faster pace, from 11 to only 4 percent of GDP, leaving a capital budget with But more recently, investment budget cuts a larger share for basic infrastructure spending helped improve the composition of the (Figure 29). This helped sectors such as roads, capital budget. health and education protect their shares and indicates an attempt to safeguard spending With the recent cuts to the investment on basic infrastructure. Figure 28: Public administration was the largest Figure 29: … but fiscal consolidation contributed investment spending category prior to 2015… to shedding of public administration spending Composition of capital expenditure budget; 2009-15 Sectoral composition of capital spending (% of total investment capital spending), 2014 - 17 100 80 Educ./ 60 Cult./ Youth/ 40 Sports, Roads, 25 10 20 Water, Habita- 0 Sanitation & tion & 2014 2015 2016 2017 Irrigation, 7 Environ- Health, ment, 6 5 Others Agriculture/Fisheries Pub. Admin./ Mu- Health Education/Cult./Youth/Sports Defense, 35 Others, 6 Agric/Fish, 4 nic, 2 Public Works Pub. Admin./Defense Source: World Bank staff estimates based on MEF and BOOST. Source: World Bank staff estimates based on MEF and BOOST. The Spatial Distribution to underserved areas? To answer this question, of the Public Investment we disaggregate investment expenditure to Program. the subnational level (provinces and districts) and by rural and urban zones by combining Did the increases in public investment during detailed public expenditure information with Mozambique’s boom years boost investment administrative data that proxies subnational 27 mozambique economic update december 2019 spending levels32 to generate the first 2009, rural areas had lower access to basic available estimates of district level investment infrastructure than urban, with Zambezia, Tete, expenditures. The results show significant Inhambane and Manica having the lowest levels variation in expenditure levels both between of access (less than half of the access levels of and within provinces. In general, expenditure Maputo). Investment levels in Inhambane and trends mirror the access indicators in pointing to Manica were amongst the highest in the country lower investment levels in northern and central over this period, helping these two provinces zones, especially Nampula, Zambezia and Cabo catch-up and improve their position in the Delgado. This divide is most apparent in non- access to basic infrastructure index by 2015. roads spending patterns. Zambezia and Tete, the two provinces with the lowest rates of access both in 2009 and 2015, Insufficient progress in channeling resources were amongst the least well-funded areas, which to underserved areas. further contributed to their limited progress. Nampula, the province that experienced the The provinces with the lowest levels of access largest deterioration in access was also amongst to basic infrastructure in 2009 were amongst the least well-funded. Other parts of the country the least well-funded in subsequent years. such as Niassa and Cabo Delgado show a more As discussed in the first part of this report, in mixed pattern (Figure 30 and Figure 31). Figure 30: Insufficient progress was made in Figure 31: …with expenditure trends mirroring channeling resources to underserved areas… access indicators District level investment by quintile, 2009 - 15 Basic infrastructure access index by district, 2015 Q5 Q5 Q4 Q4 Q3 Q3 Q2 Q2 Q1 Q1 Q5 = highest investment Q5 = highest access Q1 = lowest investment Q1 = lowest access Source: World Bank staff estimates based on World Bank Source: World Bank staff estimates based on World Bank Infrastructure database. Infrastructure database. Urban bias in roads investment and difficulty spending had the opposite tendency. Figure 32 in keeping-up with population growth. plots district level road and non-road expenditure between 2009 and 2015 against district levels of Road expenditure tended to be higher in urbanization.33 The results of this basic measure urban areas, thus contributing to the observed indicate a tendency for higher road spending in decline in rural connectivity, whereas non-road more urban districts. This suggests that a larger 32 Information from the Roads Fund on provincial expenditure shares is used to split total road expenditure by province. The data is further disaggregated to the district level using the size of the road network in each district. Non-roads capital expenditure, which relates mostly to health, education and other sectors that employ a large volume of civil servants, is split by province using the size of the local public administration as a proxy and is further disaggregated at the district level based on population shares. 33 Roads expenditure per km2 and non-roads per capita. 28 part two: mind the rural investment gap share of the roads budget during the investment Moreover, investment has been unable to boom years focused on urban connectivity, keep up with population growth. Figure echoing the significant increase in distance 33 indicates a limited link between roads to transport reported by rural households and expenditure and population growth, possibly resulting in decreased levels of rural connectivity. as roads coverage is linked more closely to One of the reasons for this could be linked to area size. But when it comes to non-road the costs of maintaining the road network, which expenditure, the evidence suggests that per may naturally favor urban areas as they have a capita expenditure levels decline as population denser road network. In contrast, non-road growth rates rise; investment in access to expenditure tends to decrease with the level of basic non-roads infrastructure is not keeping urbanization, possibly reflecting progress in the up with demographic needs, even during the larger rural per capita allocations in sectors such investment boom years. as health, education and water. Figure 32: A large share of the budget for roads focused on urban connectivity, whilst non-roads spending is more evident as the levels of urbanization decrease Relationship between road and non-road investment (2009-15) and level of urbanization at the district level Roads Non-Roads 10⁷ 10⁴ Investment non-roads per capita Investment roads per capita 10⁶ 10⁵ 10³ 10⁴ 10³ 10² 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Urbanisation, % Urbanisation, % Source: WB staff estimates using BOOST; INE. Figure 33: Investment levels tend to have a weak relationship with population growth Relationship between road and non-road investment (2009-15) and the rate of population growth at the district level Roads Non-Roads 10⁷ Investment roads per unit area Investment non-roads per capita 10⁴ 10⁶ 10⁵ 10³ 10⁴ 10² 10³ -1 0 1 2 3 4 5 6 7 8 9 -1 0 1 2 3 4 5 6 7 8 9 Population Growth, % Population Growth, % Urban & Rural Urban Rural Urban & Rural Urban Rural Source: WB staff estimates using BOOST; INE. 29 mozambique economic update december 2019 Why Invest in Closing the of opportunity. Urban areas are densely Rural Investment Gap? populated growth hubs that can potentially generate high returns to good investments Because rural investment matters for both whereas rural areas contain most of the rural and urban welfare. population and the majority of the poor. So, what is the right investment mix? To As Mozambique’s population grows and explore this question, we draw on important begins to become more urbanized, whilst insights from the economy wide model34 most of the poor remain in rural areas, that discusses the potential tradeoffs and getting the public investment mix right will outcomes of investment scenarios (see Box 6 be critical for both growth and equality for more details on the economy wide model). Box 6: The economy-wide model The economy wide model discussed in or domestic and external events (Dorosh this section of the report is a “computable et al, 2016). It draws on a 2012 social general equilibrium” (CGE) model, which accounting matrix (SAM) for Mozambique, captures the workings of the economy a consistent framework that captures the and the linkages between households, flow of transactions that takes place in the producers, government and the rest economy, which has spatially disaggregated of the world to estimate the potential across cities, towns and rural areas (Thurlow impact of policy changes, investments and Seventer, 2016). ¹ Thurlow, J. and D.E. Van Seventer. 2016. A social Accounting Matrix for Mozambique: A Nexus Project SAM. Washington DC, USA: IFPRI. ² Dorosh, P. et al. 2016. Urbanization, Rural-Urban K=Linkages, and Economic Development in Mozambique. Background paper for the World Bank Mozambique Urbanization Review. Washington DC, USA: IFPRI. The model indicates that maintaining urban per capita investment levels to meet urban population Instead, leveraging urban growth to invest in needs, at the expense of rural investment, rural areas can be advantageous to both rural penalizes welfare in both urban and rural areas. and urban areas. Given the adverse effects of The model results show that such a policy would an urban-centric investment program on rural raise urban GDP and welfare growth levels and growth, the model evaluates the implications yield faster growth in industry and services, thus of a higher volume of investment overall, to accelerating structural change. But these effects allow for higher rural investment levels whilst come with an important trade off through also raising urban investment. The increase in slower growth in the rural economy and in rural public investment is financed by higher taxation welfare levels. This scenario also leads to worse in cities. It’s a scenario that leverages growth in outcomes for the urban poor. This is because urban areas to finance rural investment needs weaker agricultural growth would have a upward and support a more balanced investment knock-on effect on urban food prices, especially portfolio. This approach results in the same for less imported products, disproportionately increase in national GDP growth as the urban impacting the urban poor. Overall, the results investment scenario, whilst also providing more of this scenario warn against an urban-centered rapid agricultural growth. Agriculture’s linkages investment program, even in the context of more to manufacturing (mainly agro-processing) and rapid urbanization, given the potential for adverse services create rural-urban spatial linkages and effects on the rural economy and the urban poor. jobs in these industries, especially in towns. 34 Dorosh et al.; “Urbanization, Rural-Urban Linkages, and Economic Development in Mozambique”; IFPRI; 2016. Background report prepared for the 2017 World Bank Mozambique Urbanization Review. 30 part two: mind the rural investment gap This also promotes structural change. Cities district level estimates of investment expenditure also grow, albeit at a slower rate than the on roads, we use data from the Roads Fund, a urban-centric investment scenario. In terms public agency executing major road investments of outcomes, whilst all groups (poor and non- to obtain information on the sub-national poor in rural and urban areas) experience welfare distribution of investment. Similarly, non-road growth, the improvements in wellbeing of the investment is disaggregated to the provincial rural population and the town-based poor level using the size of the public administration exceeds the urban-centric scenario. (measured by the size of the civil service workforce) as a proxy for investment expenditure Because raising access in rural areas is at the provincial, then further disaggregated at linked to faster job creation. the district level based on population shares. In the absence of a more accurate measure of The analysis in this section explores the district level investment spending, this approach relationship between public investment was adopted considering the expected close expenditure, access to basic infrastructure link between spending on schools, health and jobs in rural and urban areas. We measure facilities and other infrastructures and the how within-district changes in investment number of civil servants (e.g. teachers and health expenditure affect within-district changes in workers) in a district. The data on outcomes access to basic infrastructure and jobs using such as consumption expenditure, poverty, a district level fixed effects model. This also and employment are obtained from the from allows for the differentiation of the results by 2008/09 and 2014/15 IOF surveys.36 We also rural and urban areas. The estimates are thus use the information the survey provides on akin to a difference-in-differences estimate distance to schools, clinics, water, transport37 (Box 7 provides more detail). Two types of and markets to measure access to public these expenditures are considered: investment basic infrastructures. spending on basic infrastructure and spending on roads only, given the importance of roads in The results indicate that the public investment Mozambique’s investment budget and the extent budget has a more catalytic role in improving of the deterioration in access to transport noted access levels in rural areas. The results suggest in the previous section. that a MZN 1 billion (around 32 million $US in 2014) increase in investment is associated The analysis draws on detailed public with a 2 minute decrease in the time it takes expenditure data and household level an individual to access key infrastructures on information from the Inquérito sobre average. The association is stronger in rural areas, Orcamento Familiar (IOF). Data on public where the increase is linked to a 7-minute drop in investment from 2009 onwards is sourced time needed to reach public services compared from the Mozambique BOOST, a highly with less than 1 minutes in urban areas. Similarly, detailed database of on-budget expenditure.35 a MZN 1 billion increase in roads expenditure Two expenditure categories are used in the decreases the time to reach transportation by analysis: (1) economic investments covering a 9 minutes. Here again, when we look at urban range of multi-sector investments; and (2) road and rural areas separately, we find no significant investments. The database contains detailed effect in urban areas, whereas in rural districts, expenditure information but is only partially an increase in public spending by MZN 1 billion disaggregated at the sub-national level. To obtain decreases the time to transportation by as much 35 BOOST is a database tool with detailed information on public expenditure based on data from e-Sistafe: Mozambique’s public finance information management system. The tool, now used by 40 countries, was launched by World Bank in 2010 with the aim of increasing transparency, accountability and capacity to assess expenditure efficiency. 36 Poverty rates are based on the World Bank methodology, where a poor household lives on less than $1.9 a day (2011 USD). The total number of jobs is estimated using the total number of people reporting being employed in each district and sector (public, private, and informal) and year and by grossing up the weights provided in the survey (see Blundell et al. (2004) for an example of grossing up weights). The number of informal jobs is measured by subtracting from total jobs the number of formal local jobs as per the 2014 firm census. 37 Distance to transport is considered a proxy for access to roads. 31 mozambique economic update december 2019 as 25 minutes. These results point to “more bang with the creation of private and informal jobs for the buck” for investment in rural areas when in rural areas. In particular, increasing public it comes to increasing access. Mozambique’s spending by MZN 1 billion is associated with rural areas tend to have a lower density of the creation of around 1500 jobs in the private infrastructure compared to urban areas, where sector across all areas.39 The results suggest distances to basic infrastructure tend to be that this relationship is larger in rural regions less of a concern than the needs for density, where around 2000 private jobs are created maintenance and quality of infrastructure. In and additionally 14 thousand jobs are created contrast, infrastructures such as roads and school in the informal sector. Wages remain unaffected buildings are missing or distant in many rural across districts, which suggests a horizontal areas, making investment important for raising supply curve, driven by high unemployment. the levels of access (i.e. reducing distances) to Some of the jobs created could be linked directly these infrastructures.38 to the works associated with the investment itself, but the jobs are also likely to be created Public investment is also found to be associated as infrastructure development supports growth with increased job creation, predominantly local economic activity. Box 7: District level fixed effects model specifications To explore the association between public investment and access to public goods, the following regression is estimated: Yhdt = γIdt +α d + λt + εhdt where Yhdt stands for the average reported time to transportation, markets, water, schools and clinics in hours by household h in district d and in year t, γIdt is the estimated spending on economic investments. α d and λt are district and year fixed effects and εhdt the error term which is clustered by district. Importantly, the two time periods allow the inclusion district fixed effects and estimation of how within-district changes in road expenditure affect within-district changes in access to transport. The estimate is thus akin to a difference-in- differences estimate. The same regression is estimated to explore the association between roads expenditure and access to transport. To understand the relationship between public investment and job creation across regions and sectors (public, private, informal) the following specification for economic investments and roads are estimated separately: Ys = γI s +αsd + λst + εs dt dt dt where Ys is the number of jobs in district d and in year t in sector s (public, private, informal); dt α d is a district fixed effect; λd is a year fixed effect and εhdt is the error term which is 38 These results do not imply that investment in rural areas is more efficient than urban investments. Investments in urban areas could have higher economic returns given their higher population density and concentration of economic activity. Rather, the point here is to emphasize that investment spending in rural areas is linked to faster progress in increasing access levels given the paucity of basic infrastructure. 39 This refers to direct and indirect jobs. 32 part two: mind the rural investment gap clustered by district. γIdt is public investment and captures the relationship of interest. To explore how different types of infrastructure spending interact with each other in affecting consumption and poverty, the main specification is re-estimated by sequentially introducing dummies for other public goods into the last specification and allowing for interactions with access to transportation. Because inequality in opportunity matters. population benefits evenly from these resources. Some key recommendations include: Uneven access to basic infrastructure contributes to inequality in opportunity. Setting specific targets to reach underserved Inequality of opportunity occurs when the areas in the Plano Quinquenal do Governo and ambitions of the nation’s children and youth the Plano Economico e Social. Taking spatial are unmet for lack of access to basic services disparities into account when deciding where such as education, health and connectivity to and how much to invest is essential if the public roads due to the circumstances of their location investment program is to succeed in reversing or family. It is a type of inequality that is bad the growing gaps in access. The analysis for growth since it limits the opportunities presented in this report indicates insufficient of tomorrow’s potential workforce to be progress in channeling resources to underserved productive.40 It also contributes to deepening areas and calls for a sharper policy focus. For the inequality divide and to the erosion in instance, the Plano Quinquenal do Governo, social cohesion that would be more prevalent the Government of Mozambique’s five-year in an economy more capable of providing plan, and the Plano Economico e Social, the opportunities for all. Narrowing Mozambique’s annual policy plan underlying the budget, would rural investment gap, especially in northern benefit from explicitly adopting targets that and central provinces, is needed to establish identify underserved areas and whether they a more equal footing for all segments of the are catching-up or falling behind. population. Updating budget allocation formulas to How to Close the Rural account for access gaps. The budget allocation Investment Gap? process is largely incremental. It begins by allocating resources to ensure that previous year Looking ahead, Mozambique is on the cusp spending - principally in terms of salaries, goods of a second investment boom in the coming and services - is covered to assure the continuous decade, providing a tangible opportunity to functioning of the public administration. Then, address the growing gaps in access to basic the remaining resources, if any, are distributed infrastructure. Revenues from gas production following two steps: (i) based on historical are expected to widen fiscal space significantly trends, the government splits between central in the late 2020s, providing considerable government and provinces; (ii) once the total resources for Mozambique to invest in its share of the provincial budget is determined, infrastructure and in better opportunities for the allocation follows a formula that assigns a weight population. In this favorable context, reforming of 70 percent to the subnational population the public investment program would place and 30 percent to the multidimension poverty Mozambique in a position to ensure that the index.41 Therefore, although the provincial 40 World Bank (2019), “World Development Report: The Changing Nature of Work”. 41 The Multidimensional poverty index combines measurement of household consumption with access to basic services. It is distributed as follows: household consumption (30 percent), access to clean water (15 percent), access to sanitation (15 percent), health (20 percent) and education (20 percent). 33 mozambique economic update december 2019 allocation formula gives weight to territorial budget should not come at the cost of higher disparities, the distributional impact is limited inefficiencies and misallocations. Putting as it applies to a small proportion of the total systems in place that screen proposed budget. A recent study by UNICEF (2017) shows investments before funding them will help limit that the proportion of resources subjected to this tendency in Mozambique’s investment the distributional formula averaged between budget and increase the quality of expenditure. 0.4 to 0.8 percent of the total annual spending Screening would also limit slippages from the and between and 3 to 4 percent of the annual recurrent budget to public investment program. domestic investment envelope, between 2012 The Government of Mozambique is establishing and 2014. These small figures demonstrate such an investment management system that the limited potential for the current allocation seeks to promote impact and efficiency through mechanism to tackle disparities that exist or improved project appraisal and selection emerge in population and poverty, creating a procedures. The system should be widened to high level of path dependency in the budget. include monitoring and to cover investments Moreover, evidence suggests that when by SOEs considering that, as illustrated by the compared with estimations based on the analysis, these entities undertake a sizeable share formula allocation criteria,42 the budget law of the public investment portfolio. and the actual executed spending allocations are biased towards southern provinces, sub- Strengthening municipal revenue mobilization allocating to the northern and center provinces to fund urban investment and free-up that are the poorest. In addition, a recent World resources for rural areas. Revenue mobilization Bank review of sub-national allocations (2018) by most municipalities is far below potential analyzed the different formula-based transfers as these urban authorities continue to rely on and allocations to districts highlighted the limited central government transfers to fund both their consideration of equity in allocation formulas, overheads and investments. This is mainly due e.g. by allocating equal amount for different to limited technical and administrative capacity. subnational governments43 and weak proxies For instance, most municipalities do not have for socioeconomic and access conditions at updated databases of land and assets such subnational levels, limiting accurate assessment as properties nor the technical capacity for of local needs (World Bank, 2018).44 Therefore, property appraisal to facilitate the collection of there is scope for sharpening the equity focus of property taxes. Similarly, there is significant room subnational allocation formulas by restructuring for improving municipal service delivery and the budget allocation formulas to take access gaps collection of service-related fees. Improving into account, then ensuring that the formulas revenue mobilization of urban authorities would are applied in practice. The type of analysis help finance the needed investments for smooth presented in this report, which maps the gaps progress in urbanization and help free-up much and measures relative progress, would inform needed resources for investing in rural areas.45 such reforms. Lastly, adopting a national action plan for Reducing misallocations of investment increasing access to basic infrastructure that resources to recurrent or administrative is overseen at a high level would provide uses through a sound public investment momentum and coordination to these efforts. management system. A growing investment The risk that future investments will contribute 42 As described in the MTFF document and methodology, the subnational allocation criteria for provinces is an average that assigns a weight of 70 percent to the subnational population and 30 percent to the multidimension poverty index (which combines measurement of household consumption with access to basic services). For districts, the allocation formula is a weighted average of population (35 percent), area (20 percent), district own revenues (15 percent), and the multidimensional poverty index (30 percent). 43 For example, the Road Funds allocates MZN 2 million per district irrespective of specific characteristics. 44 PERPU and FDD, for example, use aggregated poverty levels, which is a limited indicator of relative needs in terms of basic services and may not be so related to the objectives of the funds, in this case employment creation and food production. Closer proxies, such as food security to estimate support needed for food production could be explored. 45 See the World Bank “Mozambique Urbanization Review”, 2017 for a more detailed discussion of reforms needed to improve municipal revenue mobilization. 34 part two: mind the rural investment gap to maintaining the status quo or even widen in the current decentralization context. SOEs, the gap further is significant. A clearly targeted municipalities, provinces, donor projects, non- action plan that is monitored at a high level governmental organizations and other private would help to reverse this trend. Coordination initiatives play an important role. 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