The Mozambican Economy - Moment of Truth

Moment of Truth

Favorable Economic Outlook

A supportive outlook for the international economy and a continued improvement in the domestic market suggest that real GDP growth in Mozambique could surpass 8% this year and average 7.8% in 2015-16F. Growth should be mainly driven by sectors like the extractive industry, namely coal and LNG where Mozambique is expected to become one of the largest exporters in the world before the end of the decade. The financial services, construction and retail sectors are also expected to benefit from structural projects. These projects should have a positive contribution to the balance of payments, fiscal revenues and employment of the country. Inflation is moderate at mid-single digits and should remain contained by vigilant monetary policy from the Central Bank, despite potential climatic risks and the upcoming elections in October.

Priority Spending in Infrastructure and Social Development

The authorities are committed to prioritize public spending toward infrastructure and social development, with two thirds of budgetary spending aimed at priority sectors. Mozambique already has a high rate of public investment (about 15% of GDP), with more than half of this being financed internally. Public wages represent more than 10% of GDP and absorb more than half of current spending. However, spending on the social side is very limited. The aim is to double the budget allocation for social protection to 0.8% of GDP over the medium-term in order to address the high level of poverty as well as the risks faced by the local population from potential economic and climatic shocks.

Many Challenges Ahead

Mozambique remains one of the poorest countries in the world and highly dependent on international donor support (mainly from the EU and World Bank). Combating poverty and achieving inclusive economic growth are therefore at the center of the government´s structural reform agenda, which is endorsed by the IMF. This will require generating more employment and improving human capital while at the same time fostering a better business environment. New risks associated with the political and security environment have also recently emerged and are a serious challenge for the local authorities. These could affect some investment decisions and, as a result, jeopardize the aforementioned growth forecasts. The outcome of these elections present another test as to how the country will end up using the increasing domestic resources for a more equal income distribution to all of its citizens and regions.