The Mozambique economy has begun to recover but with a great deal of uncertainty following numerous successive shocks, including the COVID-19 pandemic that caused the first recession in almost three decades.
The eighth edition of The World Bank’s Economic Update on Mozambique concentrates its analysis on the opportunity provided by agriculture to support a long-lasting and inclusive recovery and presents reform options to realign agricultural support policies to achieve competitiveness, climate resilience, and food security goals. Additionally, the paper evaluates the nation’s economic recovery from the COVID-19 crisis and provides an overview of its economic prospects.
The report notes that Gross Domestic Product (GDP) growth reached 2.2 percent in 2021, as favorable weather conditions supported agricultural growth, and the gradual lifting of containment measures boosted private consumption, fostering recovery of services. However, the recovery has not been sufficiently broad-based. Despite the gradual uptick in domestic and global demand, growth in the extractives and manufacturing sectors remained subdued. Several constraints dampened the overall economic performance, notably the suspension of multibillion-dollar Liquified Natural Gas (LNG) projects due to escalation of insurgency, tighter monetary policy, and new waves of COVID-19 infections.
Despite continued significant fiscal pressures, revenue collection has held up and expenses have been kept in check. The overall fiscal deficit is estimated to have declined from 5.7 percent of GDP in 2020 to 4.5 percent in 2021. However, domestic public debt has continued to rise as the authorities resorted to domestic market to fulfill financing needs, given Mozambique’s limited access to external financing. The domestic debt stock reached 22 percent of GDP in 2021, up from 16 percent in 2019.
Economic growth is expected to accelerate in the medium term, averaging 5.7 percent between 2022 and 2024, as demand recovers further, and the economy benefits from the start of LNG production at the ongoing offshore Coral project in 2022 and the expected resumption of larger LNG projects. Recovery in global demand and commodity prices will continue to support export growth, and Foreign Direct Investment (FDI) inflows (mainly linked to LNG) will sustain investments. Additionally, the three-year Extended Credit Facility arrangement agreed with the IMF for 2022-2025 and budget support from other development partners, will further help to strengthen economic recovery, while addressing debt and financing constraints. However, downside risks are substantial and could substantially lower growth. These include rising import prices owing to the Ukraine conflict, further COVID-19 infection waves, and insurgency in the north.
Agriculture remains the country’s main economic activity and its agroecological diversity could be further harnessed to help in achieving food security. With the right support, agriculture can be a sustainable source of growth, poverty reduction, and food security. Available evidence shows that agricultural growth would decrease poverty and inequality over three times faster than growth in any of the other sectors. Despite its potential, agricultural productivity remains low by regional standards, with Mozambique having one of the lowest cereal yields per hectare.
Suggested policy options include:
- Shifting agricultural support to public goods and services.
- Shifting towards a more competitive agricultural policy support.
- Reducing implicit taxation of food and increase support to food-insecure households.
- Shifting support towards smart subsidies.