Third Trade Policy Review of Mozambique: Minutes of the Meeting
The third Trade Policy Review of Mozambique was held on 3 and 5 May 2017, allowing Members to have a better understanding of Mozambique’s trade and investment policies as well as the changes introduced to them since the previous review.
At the previous TPR in 2009, Members had congratulated Mozambique on its positive economic performance, but had also noted that Mozambique was among the poorest LDCs, due mainly to supply-side constraints such as poor access and high costs of utilities. At the same time, administrative hurdles had undermined the business environment and the economy’s competitiveness. Mozambique had been therefore urged to continue its reform process, so as to promote private sector development and improve the functioning of its public sector. During this review period, important changes to the legislation and institutional arrangements had indeed been introduced. They affected a wide spectrum of trade-related policies and economic activities, such as competition policy, government procurement, intellectual property rights, mining and energy, tourism and telecommunications. What exactly did these changes mean to foreign traders? Could they expect greater ease of doing business and better investment conditions? Many advance written questions had been raised in this regard, suggesting that elaboration by the Mozambique delegation at this meeting would be helpful.
Members recalled that, at the last TPR, two others factors crucial to Mozambique’s sustainable development had been highlighted, namely economic diversification and technical assistance for capacity building. In its latest report, the Secretariat had observed strong growth in Mozambique’s economy, fueled by FDI inflows into the extractive industries and supported by sound macroeconomic management. However, the economy was still relatively undiversified and vulnerable to swings in commodity prices. Recently, FDI and donor aid had both decreased, whereas inflation, as well as current account and trade deficits were on the rise. It was therefore timely that Members had this TPR, so that the Mozambique delegation could share with them the country’s long-term economic and development strategies to address these challenges.
With regard to specific trade policies and measures, the last TPR had seen improvements in customs procedures. During this review period, there had been further efforts to speed up border clearance, such as putting in place a single window, an authorized economic operator scheme and new transit regulations. And having ratified the Trade Facilitation Agreement, the authorities were ready for its implementation. Members who were interested in these new developments would have a chance to learn more about them at this meeting.
Comments on the tariff regime at the last TPR had been mixed. While Members had commended Mozambique for its unilateral reduction of tariffs, they had been concerned about the low level of bindings, and the gap between bound and applied MFN rates. As the tariff regime saw no significant changes during this review period, it might be helpful to know if the authorities had any plans to enhance its predictability in the near future.
Another area in which Members might like to see action taken was compliance with WTO notification requirements. This was a long-standing issue that had come up repeatedly in Mozambique’s last two TPRs. As it remained a concern affecting several aspects of WTO work, it still merited Members attention at this meeting.
Statement by the Discussant
H.E. Ambassador Christopher Onyanga Aparr (Uganda)
Mozambique is a least developed country in the south eastern part of Africa, bordering the Mozambique Channel, between South Africa and Tanzania, with a mean elevation of 345 metres. It has a geographical area coverage of 799,380 sq.km, 13,000 sq.km of which is water. Mozambique has a population of slightly less than 26 million people most of whom are indigenous African people; with a youth dependency ratio of 88.2%. The country has not only suffered a phase of prolonged internal conflict, but also continues to experience calamities arising from natural hazards like floods, prolonged drought and other climatic factors. As a nation, Mozambique is only 42 years old, having emerged from five centuries of colonialism and exploitation.
To my understanding, Mozambique is a country that is moving on the post conflict road towards growth and development spurred by desire for structural transformation, industrialization and diversification. The Government’s approach has been to devise regulatory and institutional frameworks in nearly all sectors of the economy, all aimed at this particular objective. In doing this, the Government hopes to secure employment for its people, promote household incomes, and ultimately guarantee stability in the country. It has, therefore, devised an investment regime that is certain to attract Foreign Direct Investment in the sectors considered to be of priority interest to its people. Mozambique has drafted measures that are aimed at the promotion of value addition. The orientation of the Government is the promotion of exports with the view to, inter alia, reduce its deficit and manage its balance of payment challenges riding on the wave of industrialization. We need to encourage the Government of Mozambique to continue the implementation of domestic reforms which will definitely contribute sustainable economic growth and development.
This is the perspective with which I expect Members to conduct this review. With the above background in mind, my presentation will largely follow a three-pronged approach: first, the overall economic environment; second, trade and investment regime; and third, sectoral policies.
The economy of Mozambique had shown strong growth since the end of its civil war in the 1990s. Real annual GDP growth averaged around 8% over the past two decades. This strong growth was attributed to sound macroeconomic management in an environment of relative political stability, which allowed for a number of large-scale foreign investment projects, and significant donor support. However, between 2009 and 2015, the average GDP growth rate slowed down and was projected at 6.9%. In fact, in 2015, the real GDP grew by 6.6% and the GDP per capita was US$601. In the same period, the average recorded inflation was 7.1%. The Government has attributed this slow-down in growth to major factors, namely: the fall in international prices of the country’s main export products, prolonged droughts, and periodic floods in the country.
It should be noted that trade in goods and services accounted for over 100% of GDP in 2015, up from 68% in 2008. With a limited export basket in 2015, in which four items (aluminum, coal, gas and electricity) accounted for almost 63% of the export commodities. Mozambique’s imports are mainly manufactured goods comprising 67% of imports, especially machinery and equipment for use as megaproject inputs, foodstuffs and other agricultural products (13%), and then fuel and mining products. In 2015, the exports accounted for US$3.2 billion, while imports were valued at US$7.9 billion, giving an export-import deficit of US$4.7 billion. In terms of product composition: extractive commodities and raw materials comprised more than 70% of the exports. This would mean there is need for value addition to, and diversification in the export products of Mozambique.
While agriculture accounted for about 25.4% of the GDP, it had a modest average growth rate of only 3.6%. Meanwhile, the extractive industry sector grew with an average 24.1%, but contributed only 2.4% on average in the GDP structure.
On the other hand, it has been reported that with US$3.3 billion of services imports, Mozambique has remained a large net importer of services, in particular in the freight transport services, construction, and professional consulting and trade-related services. Tourism has become a significant services export sector for Mozambique, although at a modest level. I am sure Members would be interested to know what strategies the Government of Mozambique is putting in place to realize the full potential of its tourism sector.
Trade policy objectives
The trade policy objectives, as contained in the current five year Plan of the Government of the Republic of Mozambique (for the period 2015-2019) are to create an appropriate environment to promote the competitiveness of Mozambican products. These include strengthening international cooperation at bilateral, multilateral and regional levels; diversifying export products and destinations; promotion of export-orientated industrialization; maximizing local content and value-addition in the processing of Mozambique’s natural resources and promote infrastructure development. In addition, the five year plan proposes to protect domestic industries, establish export processing and special economic zones, and above all improve the business environment.
It is worth noting that the Government adopted an Industrial Policy and Strategy for the period 2016-2025. There is no doubt that as an LDC, Mozambique would require the support of the international community to implement this important strategy whose overall objective is to make industry the main vehicle for economic growth, increased employment, improved living standards, and development of the country’s natural resources.
Trade and investments
Mozambique came to the quick realization of the fact that it could not do it alone to develop the country. With its vast natural resources of untapped raw materials, the Government decided to enact an Investment Code (which excludes the petroleum, natural gas and mining sectors), that would provide the legal framework for investment promotion and protection. This would include a package of incentives and tax guarantees to both national and foreign investors. The Secretariat reports that the fiscal incentives include customs duty and VAT exemptions, corporate income tax exemptions, reductions and deductions; investment tax credits; accelerated depreciation and reintegration; and personal income tax deductions. It grants more incentives for tourism promotion, and extends the corporate income tax exemption period for Industrial Free Trade Zones (IFZs) to 10 years.
It would be interesting to know the impact of current investment framework on private investment and if there are any challenges that might need to be further addressed.
As part of its industrialization agenda, Mozambique continues to operate an Industrial Free Zone (IFZ) regime, and a Special Economic Zone (SEZ). The SEZs and IFZs are considered to be central to the Government’s industrialization strategy.
Furthermore, we commend the Government for streamlining investment and export promotional activities, by merging the Investment Promotion Centre (CPI), the Office of Economic Zones for Accelerated Development (GAZEDA), and the Institute for the Promotion of Exports (IPEX) into a one stop shop now famously known as the Agency for the Promotion of Investments and Exports (APIEX).
With regards to the remittance of funds, the Secretariat notes that in order for foreign investors to remit profits out of the country and to re-export invested capital, a minimum value of foreign direct investment (FDI) of metical 2.5 million is required. Without that, foreign investors must meet one of the following three requirements: (a) generate an annual sales volume of not less than three times metical 2.5 million as from the third year of operations; (b) register annual exports of goods and services with a value equivalent to metical 1.5 million; or (c) create and maintain from the second year of operation direct employment for at least 25 Mozambican nationals who are registered with the social security system. In my view, the objective of this is to ensure increased production and productivity; improved balance of payments position through exports; job creation and improved household incomes for the local population.
Whereas the Government has put in place the requisite regulatory and institutional framework, a number of issues have been identified as being problematic for doing business in Mozambique, including access to finance amongst others.
In addressing the concerns of the business community, the Government has put in place a coordination mechanism with the private sector to promote public-private dialogue where solutions for problems that hinder the development and competitiveness of the private sector are jointly discussed with the view to identifying the needed reforms. This interaction takes place periodically and at the highest level of the Government on a bimonthly basis between sector Ministers and their private sector counterparts, and then quarterly and yearly with the Prime Minister and the President, respectively.
Additionally, as part of a 2013-2017 Strategy to Improve the Business Environment, an Inter-Ministerial Group for the Removal of Barriers to Investments has been set up to assess, implement and monitor the implementation of the action matrix contained therein on a quarterly basis.
What is important, however is that Mozambique may wish to provide more support to the question of security. Without security of life and property, foreign direct investment will be shy to visit the country. Security issues may create a chilling effect for foreign direct investment.
Trade measures and practices
On trade measures and practices: the Secretariat’s report indicates that Mozambique’s applied MFN tariff has remained largely unchanged over the review period. Its simple average tariff rate is 10%, with a higher simple average tariff on agricultural products (13.4%) than on non-agricultural products (9.5%). It is noted that Mozambique has only bound 686 tariff lines out of its schedule of 5,063 tariff lines (just over 13%). Bindings on non-agricultural products are very limited. Only 19 lines at the eight-digit level (HS 1996 nomenclature) were bound, at either 5% or 15%.
Overall, only 14.2% of Mozambique’s tariff lines are bound. Other duties and charges on all bound items are bound at 100%. All rates are ad valorem. Mozambique does not apply tariff rate quotas. As at the time of Mozambique’s previous Review, the highest average tariffs by HS chapter continue to be applied on basic food products such as meat, fish, fruits, vegetables (and products thereof), beverages, and clothing. Agriculture remains the most heavily protected sector (average tariff of 12.4%), followed by manufacturing (10%) and mining (3.7%).
It should be noted that Mozambique’s tariff shows mixed escalation overall: it is negative from raw materials to semi-processed products (with an average protection of 10.1% and 7.5%, respectively) and then positive from semi-processed to finished products (with an average level of protection of 11.6%).
While we can understand the need to balance the requirement to increase revenue, as was noted before, such a tariff structure may discourage investment in processing industries because the heavy taxation of imported inputs adds to production costs or reduces the competitiveness of products manufactured in Mozambique. There may therefore be a need for a careful balance in order to attract investment in this area.
On export taxes and surtaxes: we have noted that Mozambique continues to levy import surtaxes on cane sugar, cement, and iron or non-alloy steel and iron or non-alloy steel tubes. These affect 10 tariff lines at the HS eight-digit level. Furthermore, Mozambique imposes an export tax of 18% of the f.o.b. customs value on raw or unprocessed cashews. There is no export tax levied on processed cashews. Export taxes are also levied on all raw and processed timber. The fee rate varies according to the level of processing. Other items that are also subject to charges at export are: cotton (Cotton Development Tax of 3.5-5%), fisheries products (fisheries license fees), and mining products (production taxes).
The objectives of these charges as has been reported ranges from encouraging value addition through value chain domestic processing, with the view to promote employment; and also ensuring environmental protection and sustainable use of the forests. While the objective of value addition with the view to industrialization and job creation is applauded, some Members have raised questions on the role of fees in promoting sustainability. It is our hope that the measures on forests and timber are consistent with the Government’s commitments under the Paris Climate Change Agreement.
With regard to customs procedures: we commend Mozambique for the trade facilitating measures it has put in place. During the review period, Mozambique established a Single Electronic Window System for customs clearance, launched an Authorized Economic Operator scheme, liberalized transit regulations and then created a one-stop boarder post with South Africa. On 6 January 2017, Mozambique submitted its instrument of acceptance of the Agreement on Trade Facilitation. While the WTO does not have aggregated data to indicate the cost savings in terms of time and money, these measures are certainly a welcome development.
We note, however, in the report that Mozambique still maintains the practice of the use of Customs Brokers of all commercial imports, exports and goods in transit. Authorities have observed that this practice will be phased out during the implementation of the Trade Facilitation Agreement. It is also important to note that Pre-Shipment inspections (PSI) also remain in place although on a reduced list of goods, as has been noted in the Secretariat report. We are pleased to note that the Government is said to be considering phasing out PSI and is currently training its officials. As an LDC, Mozambique can surely take advantage of the S&DT provisions for LDCs in the TFA.
It is noted that regional integration is an important component of Mozambique’s trade policy. Preferential tariffs are in place for SADC members. 99.6% of duties on goods originating from SADC members are now at zero. The remaining 0.4% of dutiable lines (22 tariff lines at the HS eight-digit level) has been exempt from tariff reductions. Tariff liberalization under the SADC-EU EPA will be implemented upon the entry into force of the Agreement. There is no doubt that regional integration initiatives will contribute in the expansion and diversification of export markets for Mozambique products.
As an LDC, Mozambique is a beneficiary of all non-reciprocal preferential arrangements such as Duty Free and Quota Free Market, and Preferential Rules of Origin granted by developed countries, and developing countries in a position to do so. This would include Everything But Arms and AGOA. In its national report, Mozambique reports that, on 10 June 2016, it signed the Economic, Final and Comprehensive Partnership Agreement with the EU. In my view, Mozambique is still trying to find its landing zone in terms of industrial development. We have seen how Mozambique has embedded export taxes in its regime not only as a way to promote value addition but to promote domestic industries. We would want to know to what extent this action is consistent with the Government’s long-term vision of structural transformation and industrialization.
On Government Procurement: it has been reported that the estimated total value of Government procurement was metical 47.9 billion (21.6 billion for goods, 16.1 billion for services and 10.2 billion for works). Over the review period, the Government of Mozambique has continued to reform its procurement regime. New Public Procurement Regulations entered into force on 6 June 2016. The objectives of legislative reform were meant to, inter alia, increase transparency reduce the use of direct procurement, increase business opportunities for foreign competitors, remove barriers to the submission of complaints by competitors, and increase the thresholds for the application of limited tenders. It has been reported that these regulations do not apply to public enterprises or to enterprises in which the State has an equity share. A new and separate legislation is being developed towards this end.
We commend Mozambique for the reform in this sector, though. This is a prudent exercise of its policy space. We would be happy to learn the extent to which foreign competitors can engage in procurement processes in Mozambique. We are yet to know if there are certain thresholds to which they can bid, and others reserved for the nationals. Are there local content requirements? We understand that there is no immediate obligation to accede to the Plurilateral GPA of the WTO.
I would like to look a little more closely at Government policies concerning certain crucial sectors of the Mozambican economy.
On agriculture: as the case is in many African countries, the Secretariat reports that 86% of the people in Mozambique depend on agriculture as their primary means of subsistence. The contribution of agriculture to GDP was an estimated 25.5% in 2015. While the contribution of agro-commodities to overall exports was 22.7% in the same year. Mozambique aims to commercialize agriculture, shifting production away from mainly subsistence activities and promoting access to international markets. This would not only promote poverty reduction but also enhance the attainment of food security. The Government would therefore require to employ innovative measures to increase production and productivity. 62% (49 million hectares) of the total land area of Mozambique is suitable for agriculture, but only 16% of that is estimated to be cultivated and only 3% is estimated to be irrigated. Therefore, the immediate and positive implementation of the Strategic Plan for Agricultural Development (PEDSA) would be a step in the right direction.
On fisheries, we note that Mozambique has considerable potential for fisheries as well, but the sector faces some challenges. It has a 2,750 km of coastline. Its Exclusive Economic Zone (EEZ) is 200 miles off the coast, covering 586,000 km2 of ocean water masses.
The Secretariat has noted that while fisheries increased from 34,000 tonnes in 2000 to almost 288,000 tonnes in 2015, commercial production and exports have not grown since the turn of the century. The Government has now shifted emphasis from exports to production for the domestic market through the promotion of artisanal fisheries and aquaculture, while also taking measures to contain overexploitation. It may therefore be important for Mozambique to follow the negotiations on fisheries (subsidies) in the WTO with a view to ensuring that the policy space required for the growth and development of this sector, and its subsequent integration into the global value chain of this industry, is preserved.
On manufacturing: the Government adopted an Industrial Policy and Strategy, which sets out the broad guidelines of industrial development in the country. Furthermore, the National Development Strategy (2015-2035) seeks to promote industrialization. The main strategic objectives for the development of the sector are: increasing production and productivity, promoting industrialization oriented towards modernizing the economy and increasing exports, the promotion of employment, value chain promotion of national primary products, ensuring incorporation of local content, and improving the business environment.
In Mozambique, it is reported that manufacturing accounts for only 10% of GDP. The Mozal aluminium smelting plant dominates the sector, while the rest of the sector has significantly under-performed over the last decade. Mozal contributed to 48% of Mozambique’s industrial output and further represents 75% of manufacturing exports with the view to avoiding over concentration.
Generally, tariff protection in the manufacturing sector has not changed significantly from 2010 to 2016. It ranges from 0% to 20%, depending on the activity. Apart from customs duties, imported manufactured goods which compete with products manufactured locally are subject to surcharges, as in the case of sugar, cement, and certain galvanized steel products. The Government should explore measures to ensure a diversified range and increased export of value added manufactured products.
On tourism: Mozambique has significant potential in tourism based on its range of beach holiday products, ecotourism, cultural diversity, and extensive coastline. The Government has made tourism a development priority since 2000. The relevance of tourism to economic growth and poverty reduction is also acknowledged by the Strategic Plan for the Tourism Sector 2004-2014. According to the authorities, tourism earnings consistently increased from 2009 to 2012. During 2009-2013, an average of 1.9 million persons per year arrived in the country. It is my conviction that a lot can be done in the tourism area. The delegation of Mozambique may wish to look at some of the notifications that the LDCs group has received pursuant to the LDC Services Waiver. Some Members have indicated readiness to allocate specific and targeted technical assistance aimed at the development of tourism related infrastructure. This would help to operationalize the Tourism Strategic Plan by taking advantage of the preferential treatment made available to LDCs.
On transport and logistics: Mozambique is responsible for 70% of SADC’s transit traffic, with logistics corridors such as the Maputo, Nacala, and Beira Corridors. These provide the link between the deep-water coastal ports with neighboring countries. It therefore plays a major role in regional trade, as it provides important transportation corridors for cross-border businesses for exporters and importers of goods. The main challenge remains the state of the infrastructure in Mozambique. Most of the country’s transport network was destroyed during the civil war. It is therefore important that the Government takes steps to address this issue with the view to facilitating trade, agricultural and other critical economic developments, and human activities.
In conclusion, Mozambique, as an LDC, has made, and continues to make important steps towards structural transformation and industrialization. Mozambique wants the same things for its people as we do for ours: jobs, improved household incomes, peace, security and stability, among others. The challenges facing the country remain enormous but these are not insurmountable. The challenges include: social economic infrastructure, good governance, limited liberalization in some sectors of the economy, lack of finance and limited attractiveness in the banking sector. However, we must congratulate Mozambique for the major and positive steps it has taken towards its own political and economic development.
In terms of recommendations, we might make the Government might need to on a few specific and targeted sectors that would drive the economic development of the country. It must deal with the issue of security, and mobilize the requisite funding. There must be deliberate efforts to increase production and productivity, and thereby make maximum use of all the preferential treatment that is available to LDCs within the WTO.
Members of the WTO should also give maximum exercise to restraint in requiring LDCs such as Mozambique to undertake commitments that are not consistent with their level of development, like financial and trade needs.