Economy of Mozambique

The economy of Mozambique has developed since the end of the Mozambican Civil War (1977-1992), but the country is still one of the world's poorest and most underdeveloped. Civil war opposing RENAMO to FRELIMO, ineffective socialist economic policies, government mismanagement, and severe droughts plagued Mozambique's economy throughout the 1980s, leaving it heavily dependent on external assistance. In 1987, the government embarked on a series of macroeconomic reforms designed to stabilize the economy. These steps, combined with donor assistance and with political stability since the multi-party elections in 1994, have led to dramatic improvements in the country's growth rate. Inflation was brought to single digits during the late 1990s although it returned to double digits in 2000-02. Fiscal reforms, including the introduction of a value-added tax and reform of the customs service, have improved the government's revenue collection abilities. In spite of these gains, Mozambique remains dependent upon foreign assistance for much of its annual budget, and a large majority of the population remains below the poverty line. Subsistence agriculture continues to employ the vast majority of the country's workforce. A substantial trade imbalance persists although the opening of the MOZAL aluminium smelter, the country's largest foreign investment project to date has increased export earnings. Additional investment projects in titanium extraction and processing and garment manufacturing should further close the import/export gap. Mozambique's once substantial foreign debt has been reduced through forgiveness and rescheduling under the IMF's Heavily Indebted Poor Countries (HIPC) and Enhanced HIPC initiatives, and is now at a manageable level.

History

Portuguese rule

Although the Portuguese participated in the trading networks of East Africa as early as the 16th century, they did not establish hegemonic (total) colonial dominance over the entire territory that now comprises Mozambique until the 19th century. Portugal founded settlements, trading posts, forts and ports. Cities, towns and villages were founded all over the territory by the Portuguese, like Lourenço Marques, Beira, Vila Pery, Vila Junqueiro, Vila Cabral and Porto Amélia. Others were expanded and developed greatly under Portuguese rule, like Quelimane, Nampula and Sofala. By this time, Mozambique had become a Portuguese colony, but administration was left to the trading companies (like Mozambique Company and Niassa Company) who had received long-term leases from Lisbon. By the mid-1920s, the Portuguese succeeded in creating a highly exploitative and coercive settler economy, in which African natives were forced to work on the fertile lands taken over by Portuguese settlers. Indigenous African peasants mainly produced cash crops designated for sale in the markets of the colonial metropole (the center, i.e. Portugal). Major cash crops included cotton, cashews, tea and rice. This arrangement ended in 1932 after the takeover in Portugal by the new António de Oliveira Salazar's government. Thereafter, Mozambique, along with other Portuguese colonies, was put under the direct control of Lisbon. In 1951, it became an overseas province. The economy expanded rapidly during the 1950s and 1960s, attracting thousands of Portuguese settlers to the country. It was around this time that the first nationalist guerrilla groups began to form in Tanzania and other African countries. The strong industrial and agricultural development that did occur throughout the 1950s, 1960s and early 1970s was based on Portuguese development plans, and also included British and South African investment.

In 1959-60, Mozambique's major exports included cotton, cashew nuts, tea, sugar, copra and sisal. The expanding economy of the Portuguese overseas province was fuelled by foreign direct investment, and public investment which included ambitious state-managed development plans. British capital owned two of the large sugar concessions (the third was Portuguese), including the famous Sena states. The Matola Oil Refinery, Procon, was controlled by England and the United States. In 1948 the petroleum concession was given to the Mozambique Gulf Oil Company. At Maotize coal was mined; the industry was chiefly financed by Belgian capital. 60% of the capital of the Compagnie de Charbons de Mozambique was held by the Societe Miniere et Geologique Belge, 30% by the Mozambique Company, and the remaining 10% by the Government of the territory. Three banks were in operation, the Banco Nacional Ultramarino, Portuguese, Barclays Bank, D.C.O., British, and the Standard Bank of South Africa. Nine out of the twenty-three insurance companies were Portuguese. 80% of life-insurance was in the hands of foreign companies which testifies the openess of the economy. The Portuguese overseas province of Mozambique was the first territory of Portugal, including the European mainland, to distribute Coca Cola. Lately the Lourenço Marques Oil Refinery was established by the Sociedade Nacional de Refinação de Petróleo (SONAREP) - a Franco-Portuguese syndicate. In the sisal plantations Swiss capital was invested, and in copra concerns, a combination of Portuguese, Swiss and French capital was invested. The large availability of capital from both Portuguese and international origin, allied to the wide range of natural resources and the growing urban population, lead to an impressive growth and development of the economy. From the late stages of this notable period of high growth and huge development effort started in the 1950s, was the construction of Cahora Bassa dam by the Portuguese, which started to fill in December 1974 after construction was commenced in 1969. In the face of intransigent Portuguese ruling authorities, the main nationalist movement, FRELIMO, began a guerrilla war which gradually wrested control of parts of the northernmost regions of the territory from the Portuguese. The Mozambican War of Independence came to an end in 1974 following a leftist military coup in Portugal. The new left-wing government in Lisbon had no wish to maintain an empire and negotiations on the country’s independence began immediately. In 1975, after the leftist military coup of 24th April 1974 in Portugal that overthrew the Estado Novo regime which had governed the nation and its overseas territories, the colonial wars that raged in the various Portuguese African territories since the early 1960s ended. At independence, Mozambique’s industrial base was well-developed by Sub-Saharan Africa standards, thanks to a boom in investment in the 1960s and early 1970s. Indeed, in 1973, value-added in manufacturing was the sixth highest in Sub-Saharan Africa. However, further industrialisation was stopped by the hasty exodus of 90 percent of Portuguese settlers, which left the country virtually without skilled manpower. The situation was exacerbated by the Mozambican Civil War (1977-1992) during the following years, when Mozambique was already a sovereign state.

Independent Mozambique

Mozambique became an independent state in 1975. The exodus of trained Portuguese and the eruption of the Mozambican Civil War in 1977 opposing RENAMO to FRELIMO, drove the country to absolut chaos. Mozambique became an independent nation and the Frente de Libertacao de Mocambique (FRELIMO), the socialist guerrilla organization that had fought the colonial war against Portugal, assumed power. Over the next several years, FRELIMO pursued numerous socialist policies, including nationalization of land and large industries, centralized planning, and heavy funding for the educational and health sectors, which however, remained ineffective for decades in independent Mozambique. The exodus (mass departure) of the Portuguese following independence in 1975 facilitated the takeover of many shops by Mozambicans. Unfortunately, the exodus, which totaled over 275,000 ethnic Portuguese, also led to a huge loss of professionals, productive machinery, entrepreneurs, and skilled workers. By the early 1980s, Mozambique became what Joseph Hanlon—author of Peace Without Profit: How the IMF Blocks Rebuilding in Mozambique —called a "Cold War battlefield." The term refers to the situation in which socialist FRELIMO, with Soviet backing, was forced to fight a lengthy civil war (Mozambican Civil War) against a counterinsurgency movement of Mozambicans named RENAMO, funded and directed by the neighboring capitalist economies of apartheid South Africa and the then Rhodesia. The cold war was defined by animosity between capitalist and socialist world powers, and though there was never an outright military conflict between the former and the latter, each respectively funded counterinsurgency movements against governments they disfavored. The capitalist governments of South Africa and Zimbabwe feared that a successfully ruled African socialist system might send a message of revolution and self-rule to citizens in contemporaneous free African countries, such as their own. Under the guidance of the Reagan administration, the United States also provided support to RENAMO, which sustained a civil war against FRELIMO until a Peace Accord was signed in October 1992.

The political pressure of the ideologically charged civil war, in conjunction with the excruciating need for aid and funds to finance imports, compelled FRELIMO to negotiate its first structural adjustment package (SAP) with the World Bank and the International Monetary Fund (IMF) in 1986 (commonly referred to as the Bretton Woods Institutions or International Financial Institutions—IFIs). The series of SAPs that followed thereafter, required privatization of major industries, less government spending, deregulation of the economy, and trade liberalization. The SAPs, therefore, have essentially focused on the implementation of an unfettered free market economy.

Today, the economy of Mozambique continues to be dominated by agriculture. Major exports include prawns, cotton, cashew nuts, sugar, citrus, copra and coconuts, and timber. Export partners, in turn, include Spain, South Africa, Portugal, the United States, Japan, Malawi, India, and Zimbabwe. Imports, such as farm equipment and transport equipment, are capital goods that are worth more than agricultural products, hence Mozambique's large trade deficit. The country also imports food, clothing, and petroleum products. Import partners include South Africa, Zimbabwe, Saudi Arabia, Portugal, the United States, Japan, and India. In the past several years, the value of imports outweighed the value of exports by 5 to 1 or more—a factor that obliges Mozambique to depend heavily on foreign aid and loans by foreign commercial banks and the Bretton Woods Institutions (BWIs). In 1995 alone, Mozambique received $1.115 billion in aid. In 1999, the total external debt stood at $4.8 billion. Fortunately, in the same year significant economic recovery did occur, as the real GDP growth rate reached 10 percent.

ectors

All economic sectors ranging from manufacturing and agriculture to tourism and finance, declined sharply after independence from Portugal in 1975, but picked up in the 2000s after the end of the Mozambican Civil War, although they are still performing well below potential.

Agriculture, fishing and forestry

Agricultural potential is high, particularly in the fertile northern regions, which accounts for the bulk of the country's agricultural surplus. The main cash crops are sugar, copra, cashew nuts, tea, and tobacco. Total sugar production was expected to rise by 160% in he 2000s, which would made the country a major net exporter for the first time since independence. All the plantations and refineries have been privatized. Marine products, particularly prawns, are Mozambique's largest single export. There is an abundance of marine resources that are not fully exploited. After the Mozambican Civil War, the return of internally displaced persons and the gradual restoration of rural markets have enabled Mozambique to increase agricultural production dramatically.

Mining and semi-processing

There are large mineral deposits, but exploration has been constrained by the civil war (1977-1992) and poor infrastructure. The World Bank has estimated that there was the potential for exports worth US$200m by 2005 – in the late 1990s they totaled US$3.6m, some 1% of total exports, and a contribution of less than 2% of GDP. Minerals currently being mined include marble, bentonite, coal, gold, bauxite, granite and gemstones. Illegal exports from artisanal production are estimated at being as high as US$50m.

Manufacturing

Although very well developed during the 1960s and early 1970s, industrialisation declined rapidly with the decline of most Portuguese after independence. Since 1995 production has increased sharply and was expected to grow by 33% in 2001 due to the expansion (costing US$860m) of the Mozal aluminium smelter which was approved in mid-2001. The country’s largest ever foreign investment, Mozal has little impact on employment, but is making a substantial contribution to balance of payments through taxes generated. Exports generated in the first quarter of 2001 were worth US$85.3, the primary factor for the 172% expansion in Mozambique’s exports for the period. Completion of the smelter resulted in aluminium accounting for up to 70% of exports. Construction materials, agricultural processing, beverages and consumer goods were the main sub-sectors.

Tourism

This sector declined sharply after independence from Portugal, but has been developed, although it is still performing well below potential. The national strategy is to promote high-value, low-volume tourism. The first section of the “Peace Park” initiative which links with Kruger Park in South Africa, and Gonarezhou in Zimbabwe, was project aimed at the development of tourism.

Finance

The banking system collpased after independence from Portugal in 1975. From an earlier position (in the 1980s) of central government control of the economy, Mozambique has initiated rapid reforms in recent years, accelerating the implementation of market-based economic policies, and committing to a policy of fiscal and monetary discipline. In 1995 the government introduced its medium-term economic growth, strategy which it continues to pursue. Since the late 1990s, both national and international banking, established an environment for rapid economic growth and development of the financial system.

Macroeconomic review

Alleviating poverty. At the end of the civil war in 1992, Mozambique ranked among the poorest countries in the world. It still ranks among the least developed nations, with very low socioeconomic indicators. In the last decade, however, it has experienced a notable economic recovery. Per capita GDP in 2000 was estimated at $222; in the mid-1980s, it was $120. With a high foreign debt (originally $5.7 billion at 1998 net present value) and a good track record on economic reform, Mozambique was the first African country to receive debt relief under the initial HIPC (Heavily Indebted Poor Country) Initiative. In April 2000, Mozambique qualified for the Enhanced HIPC program as well and attained its completion point in September 2001. This led to the Paris Club members agreeing in November 2001 to substantially reduce the remaining bilateral debt. This will lead to the complete forgiveness of a considerable volume of bilateral debt, including that owed to the United States.

Rebounding growth

The resettlement of war refugees and successful economic reform have led to a high growth rate: the average growth rate from 1993 to 1999 was 6.7%; from 1997 to 1999, it averaged more than 10% per year. The devastating floods of early 2000 slowed GDP growth to a 2.1%; estimates point to a full recovery in 2001. The government projects have caused the economy to continue to expand between 7%-10% a year for the next 5 years, although rapid expansion in the future hinges on several major foreign investment projects, continued economic reform, and the revival of the agriculture, transportation, and tourism sectors. More than 75% of the population engages in smallscale agriculture, which still suffers from inadequate infrastructure, commercial networks and investment. Yet 88% of Mozambique's arable land is still uncultivated; focusing economic growth in this sector is a major challenge for the government.

Low inflation

The government's tight control of spending and the money supply, combined with financial sector reform, successfully reduced inflation from 70% in 1994 to less than 5% from 1998-99. Rates spiked in 2000, however, to a rate of 12.7% due to economic disruptions stemming from the devastating floods. Inflation began to increase in the second half of 2001. The value of Mozambique's currency, the Metical, lost nearly 50% of its value against the U.S. dollar since December 2000, although in late 2001 it began to stabilize.

Extensive economic reform

Economic reform has been extensive. Over 1,200 state-owned enterprises (mostly small) have been privatized. Preparations for privatization and/or sector liberalization are underway for the remaining parastatals, including telecommunications, electricity, water service, airports, ports, and the railroads. The government frequently selects a strategic foreign investor when privatizing a parastatal. Additionally, customs duties have been reduced, and customs management has been streamlined and reformed. The government introduced a highly successful value-added tax in 1999 as part of its efforts to increase domestic revenues. Plans for 2001-02 include Commercial Code reform; comprehensive judicial reform; financial sector strengthening; continued civil service reform; improved government budget, audit, and inspection capability; and introduction of the private management of water systems in major cities.

Improving trade imbalance

In recent years, the value of imports has surpassed that of exports by almost 2:1, an improvement over the 4:1 ratio of the immediate post-war years. In 2000 imports were $1,217 million, and exports were $723 million. Support programs provided by development partners have largely compensated for balance of payments shortfalls. The medium-term outlook for exports is encouraging, since a number of foreign investment projects should lead to substantial export growth and a better trade balance. MOZAL, a large aluminum smelter that commenced production in mid-2000, has greatly expanded the nation's trade volume. Traditional Mozambican exports include cashews, shrimp, fish, copra, sugar, cotton, tea, and citrus fruits. Most of these industries are being rehabilitated. Mozambique is becoming less dependent on imports for basic food and manufactured goods due to steady increases in local production.

ADC trade protocol

In December 1999, the Council of Ministers approved the Southern African Development Community Trade Protocol (SADC Trade Protocol). The Protocol will create a free trade zone among more than 200 million consumers in the SADC region. Beginning the 10-year implementation process of the SADC Trade Protocol is a major goal for the region in 2002.

tatistics

GDP:purchasing power parity - $19.2 billion (2002 est.), $18.7 billion (1999 est.)

GDP - real growth rate:8% (2002 est.), 10% (1999 est.)

GDP - per capita:purchasing power parity - $1,000 (2002, 1999 est.)

GDP - composition by sector:
"agriculture:"22% (2001 est.), 34% (1998 est.)
"industry:"23% (2001 est.), 18% (1998 est.)
"services:"55% (2001 est.), 48% (1998 est.)

Population below poverty line:70% (2001 est.)

Household income or consumption by percentage share:
"lowest 10%:"2.5% (1997)
"highest 10%:"31.7% (1997)

Distribution of family income - Gini index: 39.6 (1996-97)

Inflation rate (consumer prices):15.2% (2002 est.), 4% (1999 est.)

Labor force:9.4 million (2006 est.)

Labor force - by occupation:agriculture 81%, industry 6%, services 13% (1997 est.)

Unemployment rate:21% (1997 est.)

Budget:
"revenues:"$393.1 million (2001 est.), $402 million (1997 est.)
"expenditures:"$1.025 billion, including capital expenditures of $479.4 million (2001 est.), $799 million (1997 est.)

Industries:food, beverages, chemicals (fertilizer, soap, paints), aluminium, petroleum products, textiles, cement, glass, asbestos, tobacco

Industrial production growth rate:3.4% (2000), 39% (1997)

Electricity - production:7,193 GWh (2001), 1,200 GWh (1998)

Electricity - production by source:
"fossil fuel:"2.9% (2001), 25% (1998)
"hydro:"97.1% (2001), 75% (1998)
"nuclear:"0%
"other:"0%

Electricity - consumption:1,390 GWh (2001), 1,018 GWh (1998)

Electricity - exports:5,800 GWh (2001), 483 GWh (1998)

Electricity - imports:500 GWh (2001), 385 GWh (1998)

Oil - consumption: 8,500 barrel/day (1,400 m³/d) 2001

Oil - proved reserves: 0 barrel (January 2002 est.)

Natural gas - proved reserves: 63.71 km³ (January 2002 est.)

Agriculture - products:
cotton, cashew nuts, sugar cane, tea, cassava (tapioca), maize, coconuts, sisal, citrus and tropical fruits; potatoes, sunflowers, beef, poultry

Exports:$1.69 billion f.o.b. (2005 est.), $300 million (f.o.b., 1999 est.)

Exports - commodities:aluminum, prawns, cashews, cotton, sugar, citrus, timber; bulk electricity (2001)

Exports - partners:
South Africa 15.3%, Zimbabwe 5.3%, Japan 4.2%, Portugal 4.0%, Spain (2001),

Spain 17%, South Africa 16%, Portugal 12%, United States 10%, Japan, Malawi, India, Zimbabwe (1996 est.)

Imports:$2.041 billion f.o.b. (2002 est.), $1.6 billion (c.i.f., 1999 est.)

Imports - commodities:machinery and equipment, vehicles, fuel, chemicals, metal products, foodstuffs, textiles (2001)

Imports - partners:South Africa 40.5%, Portugal 8.4%, US 1.8%, UK, 1.1%, Australia (2001),

South Africa 55%, Zimbabwe 7%, Saudi Arabia 5%, Portugal 4%, United States, Japan, India (1996 est.)

Debt - external:$966 million (2002 est.), $4.8 billion (1999)

Economic aid - recipient:$632.8 million (2001), $1.115 billion (1995)

Currency:1 metical (Mt) = 100 centavos

Exchange rates:meticais da nova familia (MZN) per US$1 - 26.3 (July 2006),

BEFORE JUNE 2006: Meticais (MZM) per US$1 - 13,392.0 (January 2000), 12,775.1 (1999), 11,874.6 (1998), 11.543.6 (1997), 11,293.8 (1996), 9,024.3 (1995)

Fiscal year:calendar year

ee also

* Economy of Africa
* Economy of South Africa
* List of Mozambican companies
* Mozambique

References

External links

*dmoz|Regional/Africa/Mozambique/Business_and_Economy/Economic_Development
* [http://www.mbendi.co.za/land/af/mz/p0005.htm MBendi Mozambique overview]