Extractive industry boosts Mozambican economy, but country needs a broader growth model

7 January 2019

The extractive industry has been boosting Mozambique’s economy and will increasingly do so with the start of natural gas exploration in 2023, but the country needs a broader growth model, according to the World Bank.

The institution said in its latest Economic Update for Mozambique that “changing the growth model to expand the drivers of growth and increase productivity in the sectors with the greatest employment potential is a major challenge that decision-makers in Mozambique currently face.”

“The extractive industries will not be enough. An intensive and ambitious focus on achieving diversification, increasing rural productivity and providing more widespread access to services in national development efforts is essential for inclusive growth,” it said.

In early 2018, Mozambique was given the final investment decision for the development of the Coral Sul natural gas project in the Rovuma basin, due to go into production in 2023.

According to the World Bank, the Mozambican economy has undergone a positive gradual structural transition, as employment in agriculture, the sector with the lowest productivity level, loses weight in relation to services – a sector that is six times more productive.

“This boosted output per worker on average, established productivity as the engine of growth in recent years and increased the pace of poverty reduction,” the study said.

The World Bank also wrote that Mozambique is now beginning to “emerge from a period of high macroeconomic volatility, two years after the disclosure of hidden debts triggered a significant economic recession.”

The current period is characterised by metical stability, which helped reduce inflation from 26% in its peak in November 2016 to just over 5% by August 2018, while a rapid increase in coal exports throughout 2017, equivalent to 7% of GDP, supported an improvement in the trade balance and the recovery of central bank reserves to seven months of import coverage.

Economic growth has slowed to 3%, down from 8% on average over the previous decade, with a decline in private demand, especially for services, which was the biggest driver of growth in the years before the economic crisis, reflecting a drop in consumer purchasing power, especially for families whose incomes did not follow the rise in prices.

The World Bank study identifies significant future macroeconomic risks, including a scenario of lower prices for major exports of coal, aluminium and tobacco, especially if imports rise again.

A recovery in import demand, if not accompanied by better export performance in key sectors such as agriculture and energy, and an increase in investment, “is likely to increase the external financing needs of the economy and increase pressure on central bank reserves,” the study said. (macauhub)