Can Mozambique realise its potential for growth?

Mozambique’s agricultural and industrial sectors hold great potential for growth, but its business environment will remain challenging if reforms are not properly implemented. Luís Fonseca reports

If trade is the lifeblood of an economy then the streets and informal markets are the arteries that flow through Mozambique. Makeshift stalls on roadsides, heavy loads on the backs of street sellers, haggled prices and a lack of documentation are the hallmarks of African trade, and Mozambique is no exception. A significant proportion of its 28m inhabitants are undocumented, which goes some way to explaining the prevalence of the informal economy.

A study by the International Labour Organisation (ILO) shows that just 6% of Mozambique’s economically active population pays contributions to the National Institute of Social Security (INSS). Progress towards an inclusive and efficient economy has been slow. However, plans are in place for the situation to change.

On 15 January, during his inaugural speech for his second term of office, Mozambique’s President Filipe Nyusi made a commitment to rise to the greatest commercial challenge facing the African continent: “We promise to facilitate the African Continental Free Trade Agreement in order to drive the development of trade relations.”

The process already has the support of the majority of the member states of the African Union and it is hoped will to lead to the creation of the world’s largest market by 2028. The African Export–Import Bank (Afreximbank) believes that the agreement will increase regional trade by $35bn per annum.

Focus on industry

However, it was industry that earned 16 references during Nyusi’s inaugural speech. Nyusi highlighted the potential of agro-industry and agro-chemistry and Mozambique’s huge agricultural potential, which is widely underexploited largely due to a scletoric business environment and lack of infrastructure. This focus on agriculture and industry is targeted to achieve “zero hunger” in the country, combating food insecurity and encouraging self-sufficiency, says the president.

The potential of textiles and clothing, metalworking and building materials were also highlighted as areas of significant potential. “This will help us to create more jobs and reduce the inequalities and disparities of the trade balance”, by producing domestically instead of importing.

What are the challenges standing in the way of industrial growth? The first, according to Nyusi, is the lack of electricity supply. As such, he promises to “bolster Mozambique’s position as an energy hub within the region of the Southern African Development Community (SADC)” in order to ensure that energy is a “driving force for social and economic development, securing agriculture and industrialisation”.

Help will be provided by the natural gas mega projects in the Rovuma Basin. The state is expected to use a portion of the resources to fund production facilities for fertilisers and liquid fuels.

Nyusi also announced other structural undertakings for this current term of office: an integrated project for the production of iron and steel in Tete, as well as a coal briquette factory in the same region (where the largest coal reserves are located), a new graphite mine in Montepuez, bolstering existing production, and increased marble extraction in the same district.

Business environment

Trade and industry in Mozambique are confronted with a challenging business environment, to say the least. In the latest assessment carried out for the World Bank’s Doing Business rankings, the country fell three places to 138 out of a total of 190 countries.

“The main point, which is also of great concern, is the fact that Mozambique fell across almost all indicators, something which is unprecedented,” states the analysis conducted by the Confederation of Business Associations of Mozambique (CTA), the main employers’ association.

It says that if Mozambique were to correctly and consistently implement the legal instruments that it has been adopting “this alone would represent a jump of 22 places” in the rankings.

Failures to reimburse value added tax (VAT), the lack of flexibility with regard to international trade and the delays in simplifying the Commercial Code and insolvency legal framework are some of the examples put forward by employers. “Improving the business environment is a process which won’t end with the adoption of laws, but will be a continual process, given the need for effective and correct implementation”, the CTA concludes.

The terms for financing businesses represent another challenge in Mozambique, with the prime lending rate of the banking system at 18%, to which each bank also adds its spread linked to the risk conditions. In two and a half years, the rate has fallen by 9.75%, but entrepreneurs complain that it is still too high.

The CTA already suggests creating an alternative line of credit aimed at small and medium-sized enterprises (SMEs) in order to deal with the unfavourable market conditions. The employers suggest creating a financial development institution with concessional funding lines, 18-month grace periods, maturity of longer than five years and interest rates of below two digits.

Mozambique’s potential has been documented for decades, but the fact that exports in the external balance are dominated by natural resources reflects the fact that trade and industry still have a long road ahead.

India continues to be the main destination for Mozambican products (27.32% share) primarily thanks to coal, followed by the Netherlands (17.38%), which buys aluminium, and South Africa, which purchases natural gas and electricity.