Mozambique is increasingly “A two-speed economy” as extractives and mega projects drive recent growth whilst other sectors lag behind, according to the third edition of the World Bank Mozambique Economic Update, released today.

Trends in early 2017 show signs of improvement in the Mozambican economy as first quarter growth picked up and the currency stabilized. Much of this improvement is attributed to the country’s recovering coal industry and a great deal of the growth outlook depends on developments in the extractives sector. According to the report, strengthening prices for extractives, along with a post el Niño recovery in agriculture and progress in the peace talks, could steer growth to 4.6 percent in 2017, and towards 7 percent by the end of the decade.

But economic conditions remain challenging. Growth is well below the levels seen in recent years and inflation remains very high at 18 percent. Monetary policy has supported a significant adjustment in the economy. However, Mozambique’s reference lending rate is now amongst the highest in sub-Saharan Africa, and average commercial bank lending rates in the region of 30 percent are prohibitively high for much of the private sector. Hence, more needs to be done to help Mozambique’s economy recover, especially the small and medium enterprises.

In a special focus section, this edition of the Mozambique Economic Update explores the profile of the formal private sector and the impact of the ongoing economic downturn on its performance. It notes growth and increased dynamism as the number of firms in the formal sector doubled since 2002 and as the share of small and medium enterprises has grown, a phenomenon that bodes well for productivity growth. These are positive signs. However, the ongoing economic downturn is likely to have a disproportionately negative impact on the emerging micro, small and medium enterprises.

“While extractives and large industries are showing some resilience, the rest of the private sector, the green shoots of the economy, is facing reduced growth in demand, higher costs, and difficulties in access to credit,” said Carolin Geginat, World Bank Program Leader for Equitable Growth, Finance and Institutions. 

Reestablishing macroeconomic stability through a more balanced mix of fiscal and monetary policy is a priority. Slowly easing inflation and lower credit levels suggest that the monetary policy cycle could begin to loosen as the economy continues to adjust. However, making this transition smoothly will require a sharper fiscal policy response to restore the health of Mozambique’s public finances. Consolidation reforms to control the wage bill would help to ease pressures on the budget, and much rests on the outcome of the debt negotiations initiated by the Government of Mozambique. Equally as important for restoring sustainability would be a commitment from the authorities to pursue policies that help Mozambique build fiscal buffers and to increase the resilience of the private sector in the long-term.

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While extractives like coal are driving recovery in Mozambique, smaller businesses vital to productivity are struggling

After a difficult 2016, the Mozambican economy is showing signs of recovery. Its first quarter 2017 GDP growth picked up to 2.9 percent, more than double the growth rate of the preceding quarter. Mozambique’s currency, the metical, is now more stable, inflation is slowly beginning to ease, and international reserves are recovering.

But economic conditions remain challenging, and the recent improvements rely heavily on the country’s recovering coal industry. And, with much of the country’s outlook for growth hinging on the extractives sector, fluctuations in global commodity prices will continue to pose large economic risks.

Also, although monetary policy has remained tight and supported significant adjustment in the external sector, Mozambique’s reference lending rate is now among the highest in sub-Saharan Africa.

Average commercial bank lending rates in the region of 30 percent are prohibitively high for much of the country’s private sector.

A stronger exchange rate, easing inflation, and lower credit levels suggest that the monetary policy cycle could begin to loosen as the economy continues to adjust. Making this transition smoothly will require a coordinated and robust fiscal policy response.

Although progress had been made, Mozambique’s fiscal position continues to be unsustainable, and overall fiscal adjustment has been limited. Subsidy reforms, a difficult area to tackle, have advanced, and will contribute to easing fiscal pressures, accumulating arrears and domestic financing are impeding the fiscal adjustment, and a sharper fiscal policy response is needed.

The country’s wage bill continues to be a significant source of pressure, while recent cuts to the investment budget are affecting the economic and social sectors, potentially worsening the composition of the budget.

Moreover, fiscal risks are materializing, especially from some of Mozambique’s large state-owned enterprises. If not managed proactively, they may compromise fiscal recovery efforts.

Small business affected most

Part Two of this Mozambique Economic Update explores the profile of the formal private sector and the impact of economic downturn on its performance.

It notes that smaller firms experienced growth and dynamism when Mozambique saw resource-driven growth acceleration. The number of firms in the country’s formal sector has doubled since 2002, for example, and these businesses now employ twice as many workers as in 2002. And the share of the economy that small and medium enterprises have is still growing, a phenomenon that bodes well for productivity growth overall.

These are positive signs. But despite its signs of recovery, Mozambique’s overall ongoing economic downturn is likely to have a disproportionately negative impact on these emerging micro-, small and medium enterprises.

The report notes that, while extractives and other large industries are showing some resilience, the rest of the private sector – the green shoots of the economy – faces reduced growth in demand, higher costs, and more difficulties finding access to credit.

Hence, re-establishing macroeconomic stability through a balanced mix of fiscal and monetary policy is a priority for private sector growth. Reforms to strengthen competition, the business environment, and skills are also essential for the resilience of firms, given Mozambique’s openness and its exposure to the commodity cycle.