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Mozambique oils the wheels of economic growth

While the recent discovery of natural gas will certainly boost Mozambique's economy, the country's president, Armando Guebuza, recognises that it will not be enough to pull the country out of poverty and end its reliance on aid. To achieve this, it will be necessary to promote growth in other areas, such as agriculture and tourism, in order to create a more diverse and sustainable economy.
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Mozambique’s economy has been anything but sluggish in the past two decades. The Lusophone southern African country has, apart from a few years, grown by at least 6% annually in the period.

But it is starting from a low base. Its gross domestic product (GDP) in 2011 was $13bn – that of neighbouring South Africa, the biggest economy on the continent, was more than $400bn. And with a GDP per capita of only about $600, its 23 million people are among the poorest in the world. But given that it was considered an economic basket case in 1992, when it had just emerged from a devastating civil war, its subsequent performance and ability to attract large-scale foreign investment has impressed analysts.

Mining promise

Much of the early investment was in Mozambique’s so-called ‘mega projects’, such as the Mozal aluminium smelter and natural gas production in the southern Temane fields. In recent years, mining companies have poured money into developing huge coal reserves in the northern Tete province. The first exports of the commodity were made by Brazilian mining company Vale in 2011.

Mozambique’s most lucrative resources are, however, still to be tapped. Exploration off its northern coast has led to the discovery of what are believed to be among the world’s largest natural gas fields. Optimists believe Mozambique could have more natural gas than any country in the world other than Russia, Iran, Qatar and Turkmenistan.

Although exports of liquefied natural gas, which will probably start towards the end of the decade, could transform the Mozambican economy, its government is not being complacent. Armando Guebuza, the president since 2005, told The Banker that plenty had to be done to prepare for large-scale hydrocarbon production. “We have to remember that gas [won’t start being sent overseas] today, or even in five years,” he says. “At this stage we are just getting ready to make sure we can export these resources.”

While Mr Guebuza wants extractive companies to eventually train locals to carry out skilled engineering jobs, he emphasises that the natural gas industry cannot be expected to create mass employment. “Mega projects are not intended to create jobs for all Mozambicans,” he says. “They are intended to create an environment in which Mozambique can acquire new technologies, raise more capital and bring in more investment.”

Taxing issue

Mr Guebuza stresses that the discovery of gas will not cause the same problems that oil has in many other developing countries where it has been found, such as creating an over-reliance on commodities and fostering corruption. Mozambique is fortunate, he says, in that it is already familiar with natural resources, even if on a much smaller scale than its new gas finds.

“I don’t believe those resources will be a curse,” he says. “It is a challenge, but also an opportunity. With our experience of older projects, such as Mozal and Temane, we have learnt to make sure our laws are such that the government, and the people through it, benefit.”

Analysts have long said that the country earns less from extractive industries than it could. The International Monetary Fund believes that between 2000 and 2007, mining accounted for just 2% of government revenues, far less than the average for other countries with similar mineral riches. This is largely because in the 1990s, having just come out of its war and with peace not yet consolidated, Mozambique needed generous tax frameworks to entice investors.

There have been calls from senior policy-makers for existing mining contracts to be revised, given that Mozambique is now in a far better position to negotiate terms with foreign companies. Mr Guebuza agrees his government could probably derive more royalties, but he says projects such as Mozal have greatly benefited the country, proving to would-be investors in other industries that they can do business there. He rules out major changes to agreements already in place in the minerals sector, although he implies that taxes for natural gas companies could be steeper.

“The older projects helped create an environment that is encouraging more investment,” he says. “We do work with those companies to see how much we can get, but we won’t discourage them from doing what they are doing. With the new investments, they will have to follow what we decide in terms of law.”

Multilateral improvements

Mozambique’s ruling Frelimo party, which Mr Guebuza joined in the 1960s, around the time it began its guerrilla campaign against the Portuguese colonialists, used to be a proponent of Marxism. But those days are long gone. Mr Guebuza, a fluent English speaker who in the years before he was voted into power became one of the country’s wealthiest businessmen, says the private sector’s growth is crucial for development. He is determined to see more local and foreign investment in the economy, particularly beyond natural resources and into areas such as tourism.

“We do believe [in] and encourage the private sector in Mozambique,” says Mr Guebuza. “We cannot grow economically if Mozambican entrepreneurs are not [allowed to thrive]. We have attracted a lot of tourism investment. Today, Mozambique, unlike in the past, is a place where many people come for holidays. But we have to do more. So we are developing policies to get people to build more hotels and restaurants.”

The government is also trying to lure investment in agriculture. The sector is easily the biggest employer in Mozambique and makes up the single largest share of GDP. Yet it is far from being as productive as it could, and the country remains a net food importer. Mr Guebuza wants this reversed and believes that his policies will see crops such as rice, maize and wheat being exported within five years.

Investment in Mozambican farms will be critical to achieving this. Some economists say that because land can only be leased in rural areas, not bought, investors are put off, as this makes it difficult for them to borrow using the land as collateral. But Mr Guebuza says that land laws are not about to change. “Land ownership is not the issue,” he says. “I don’t know of any investor – big or small – that has desisted from investing because of that.”

Private investors are being encouraged to help build infrastructure, too. Mozambique has an acute shortage of roads and railways, even in comparison to some neighbouring states such as Zambia and Tanzania. The government believes that the quickest way to develop transport infrastructure will be through public-private partnerships. Toll roads will be constructed and then operated for several years, if not decades, by private companies. And thanks to the booming mining sector, progress is already being made elsewhere. Vale is investing billions of dollars to upgrade the port of Nacala – where it will ship much of its coal from – and build a railway between there and the mining regions of Tete.

Such measures show how the country can use its natural resources to diversify the economy. The Vale-built railway will pass through many agricultural areas, making it easier for them to transport their crops to the coast. Plans are in place, meanwhile, to build a domestic gas network. If done properly, it should lead to lower energy costs for local businesses and help grow Mozambique’s tiny manufacturing industry. Other parts of the economy should also benefit, which Mr Guebuza says will be the way to create more jobs. “If we are going to solve the problem of employment, we will do so through agriculture, tourism, services and small and medium-sized enterprises,” he says.

Tackling poverty

Opponents of Frelimo, which has been in power since Mozambique’s independence in 1975, say little has been done to reduce poverty since the end of the civil war and that the mass population has yet to gain from mineral riches. They point to food riots that erupted across the country in 2010 – after bread prices were hiked, and which led to 13 people dying – as evidence of this. But the president claims otherwise, saying that Mozambicans are now better off.

“There are some reports that try to portray the idea that we are getting poorer and poorer,” he says. “But if we look into the situation, we see that we have more tarmac roads, more clinics, more potable water and more secondary schools. New jobs are being created. The situation is changing fast and we are fighting poverty. That is not to say we are pleased. We think we could do more. But we are not as poor as we used to be.”

Attesting to this, he says, Mozambique is increasingly independent of aid. Today it accounts for about 40% of the budget, having made up 60% of it a few years ago. “Numbers are not that important,” the president says. “What’s more important is the trend. We need to reduce our dependency on foreign aid.”

Most analysts, while stating that bureaucracy and corruption are still big hindrances to doing business, have praised Mozambique’s economic management in recent years. The budget deficit is set to rise from about 3.5% to 6.5% in 2012, but that is viewed as a sustainable measure in the short term, due to the low sovereign debt-to-GDP ratio, and as necessary given the government’s poverty-reduction strategy.

Moreover, monetary policy has been kept tight, which has led to a stable currency and seen inflation fall from 13% in 2010 to less than 3% today. Some bankers have called for looser conditions to stimulate credit growth, but Mr Guebuza backs the central bank’s stance. “We need tight monetary policies for the time being,” he says. “This is essential because it creates the confidence that investors need.”

If this results in more private sector investment and, in turn, employment, it will go a long way to reducing the poverty that still blights Mozambique, despite the advances it has made in the past 20 years.

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