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Mozambique Economic Update: Making the most of demographic change

Mozambique Economic Update: Making the most of demographic change
Photo credit: UN Women | Lyndal Lawson

10 Jan 2018

Mozambique is shifting to a period of slowing growth and increasing concentration. A stronger fiscal policy response and increased transparency are key for recovery, says a new World Bank report.

The second half of 2017 indicates the slowdown in Mozambique’s economic performance may be taking hold and shifting this once fast-growing economy to a more modest pace of growth, bringing economic growth down to a level barely above that of population growth.

GDP growth is expected to dip to 3.1 percent in 2017, despite increases in coal and aluminum exports. Whilst these exports boomed, small and medium enterprises (SMEs) have fallen back even more, especially in the manufacturing sector, which contracted for this first time since 1994.

The World Bank’s new Mozambique Economic Update (MEU) notes that small and medium enterprises (SMEs) are crowded out, and that not even the sizable growth of commodity exports is sufficient to counteract the effects this is having on the economy.

The level of concentration has also increased in 2017: Just a few commodities dominate exports, representing a larger share of foreign currency inflows, which heightens the country’s exposure to external shocks.

The concentration of output in the extractive and minerals sector keeps Mozambique on the path of a two-speed economy, one less capable of generating enough jobs to absorb a net inflow of the almost 500,000 people entering the labor force each year.

Trends observed in 2017 make it clear that Mozambique needs to double its efforts to support small and medium enterprises and look beyond the extractive sector for more balanced growth.

The scale of the shocks faced by Mozambique’s economy over the past two years has been immense. However, as commodity prices and conditions for agriculture improve, and external factors become less of an impediment, the economy turns to the policy response to pursue recovery. Decisive monetary policy measures and strong commodity export performances have helped to stabilize the Metical and bring inflation down in 2017. Fiscal policy also began responding, but at a slower pace.

Making the most of demographic change

In order to examine future demands on Mozambique’s economy, the special focus of December’s Economic Update discusses the challenge of transforming Mozambique’s growing and youthful population into a demographic dividend. This is ever more urgent given the drift towards a natural resource extraction based economy with low employment generation.

Mozambique lags behind other sub-Saharan African countries in kicking off its demographic transition. By 2011, its total fertility rate was estimated at an average of 5.9 children per woman, one of the highest in the world. The World Bank estimates that reducing fertility rates would represent an enormous boost to prosperity: an estimated increase in real per capita GDP of 31 percent by 2050.

“Transforming Mozambique’s population trends into a demographic dividend is an immense challenge, but so are the potential gains,” said Peter Holland, World Bank Program Leader for Human Development.

Mozambique could actively promote policies to trigger the transition, with jobs for women and better family planning services. A sharper focus is also needed on building skills for youth and an economy that grows.

The Update also calls for a sharper focus on building skills for youth, with particular emphasis again on women and an economy that grows whilst generating productive jobs for the next generation of Mozambicans.

Monetary policy

This report emphasizes that more needs to be done to stabilize the macroeconomic outlook and rebalance the policy mix with definitive fiscal policy measures. And, though monetary policy has been decisive, and contributed to stabilizing the currency at a critical time, it has also heightened the cost of credit.

Space is now opening for the monetary policy cycle to begin easing as inflation continues to fall, which would improve the private sector’s access to financing. This requires a tighter fiscal policy response and more sustainable levels of debt.

It would also require a more proactive approach to tackling the fiscal risks coming from weak state-owned enterprises, as well as necessitating increased transparency in the handling of the investigation into Mozambique’s hidden debts to restore both investor and donor confidence.

Source World Bank
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Date 10 Jan 2018
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