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Country Report

Mozambique

July 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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Mozambique 1

Country Report July 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

Mozambique

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

16 Economic policy

19 The domestic economy19 Economic trends21 Agriculture23 Industry24 Communications and infrastructure27 Financial and other services27 Energy28 Mining

29 Foreign trade and payments

List of tables9 International assumptions summary12 Forecast summary19 Consumer prices, 2004 (Maputo)20 Exchange rates, 200420 Inequality21 Growth Competitiveness Index and sub-index rankings22 Agricultural production24 Number of enterprises and employees, by province25 Port traffic29 Current account30 External debt

2 Mozambique


List of figures

6 Exchange rates6 Foreign reserves12 Gross domestic product12 Consumer price inflation23 Sugar production

Mozambique 3


MozambiqueJuly 2004

Summary

Political competition will increase steadily as all parties gear up for legislativeand presidential elections in December 2004. Despite allegations that seniorparty figures were involved in a series of corruption and murder scandals, theruling party, Frente de Libertação de Moçambique (Frelimo), is not expected tolose the elections. Strong real GDP growth, of 8.2% in 2004 and 7.1% in 2005,will be driven by output from industrial mega-projects, notably aluminium. Ifthere is no major policy slippage ahead of the elections, average inflationshould fall to 12.8% in 2004 and to 10% in 2005, owing to lower importedinflation from South Africa and strong agricultural growth. The weakness ofthe US dollar, together with strong export performance, will cause the meticalto appreciate to an average of MT23,612:US$1 in 2004, before it depreciates toMT23,650:US$1 in 2005. The current-account deficit is expected to narrowsharply to 1.9% of GDP in 2004 before increasing to 6.1% of GDP in 2005.

The fugitive accused of being the leader of the hit squad that killed thejournalist, Carlos Cardoso, has escaped from Mozambique. He was shortlyrearrested in Canada. The longest-running bank fraud case in Mozambicanhistory has ended with the conviction of seven culprits. An internal reshufflewithin Renamo, the main opposition party, has revealed that it is preparing forthe forthcoming elections. A new political coalition has been formed to contestthe elections.

The IMF has approved a new, three-year PRGF worth US$16.6m. Thegovernment and donors have met to review the government's implementationof its development programme. Their findings have been published in a JointReview of PARPA Implementation. The World Bank has approved a US$60mpoverty-reduction loan.

Inflation has been declining but remains high, at an annual average of 12.5% inMay. The metical has depreciated slightly against the rand and has appreciatedagainst the dollar. Real GDP growth in 2003 has been revised up slightly to 7.1%from 7%. Agriculture recorded strong growth in 2003. Parliament has passed atelecommunications bill aimed at introducing competition in the fixed-linetelephone network. The Beira rail corridor tender has been finalised.

Mozambique's external debt increased to US$4.6bn at end-2002, according tonew World Bank data. Mozambique has become eligible for funding from theUS government's Millennium Challenge Account.

Editors: Carolina Monsalve (editor); Angus Downie (consulting editor)Editorial closing date: July 9th, 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Mozambique


Political structure

República de Moçambique

Unitary republic

Based on Portuguese-Roman law and the 1990 constitution

250-member Assembléia da República (parliament) elected by direct, universal suffrageevery five years

December 1999 (legislative and presidential); next national elections due by December2004 (legislative and presidential). Municipal elections were held on November 19th2003; the next are scheduled for November 2008

President, chosen by direct universal suffrage

The president and his appointed prime minister and Council of Ministers; cabinetappointed in January 2000

Frente de Libertação de Moçambique (Frelimo) is the ruling party; the main oppositionparty is Resistência Nacional de Moçambique (Renamo). Two new parties have beenformed since the December 1999 general election, Partido para a Paz, Democracia eDesenvolvimento (PDD) and União para a Salvação de Moçambique (Usamo), when onlyFrelimo and Renamo won more than the 5% of the national vote needed to secureparliamentary representation (although ten small parties gained seats by forming acoalition with Renamo)

President Joaquim Alberto Chissano

Prime minister Luisa Diogo

Defence & security affairs Almerinho ManhenjeParliamentary & diplomatic affairs Francisco Madeira

Agriculture & rural development Helder Monteiro (Muteia)Defence Tobias DaiEducation Alcido NguenhaEnvironmental co-ordination John William KachamilaFisheries Cadmiel MuthembaForeign affairs & co-operation Leonardo SimãoHealth Francisco SonganeHigher education, science & technology Lídia BritoIndustry & trade Carlos MorgadoInterior Almerinho ManhenjeJustice José Ibraimo AbudoLabour Mário SeveneMineral resources & energy Castigo LangaPlanning & finance Luisa DiogoPublic works & housing Roberto Costley WhiteState administration José ChichavaTourism Fernando SumbanaTransport & communications Tomás SalomãoVeterans' affairs Antonio Hama ThaiWomen's affairs & social welfare co-ordination Virgília MataveleYouth & sport Joel Libombo

Adriano Afonso Maleiane

Official name

Form of state

Legal system

National legislature

National elections

Head of state

Ministers in the presidency

Key ministers

National government

Main political parties

Central bank governor

Mozambique 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices (MT bn) 51.9 56.9 71.1 85.2 103.7GDP (US$ bn) 4.0 3.7 3.4 3.6 4.4

Real GDP growth (%) 7.5 1.5 13.0 7.7 7.1 a

Consumer price inflation (av; %) 2.9 12.7 9.1 16.8 13.4 a

Population (m) 17.5 17.9 18.2 18.5 18.9

Exports of goods fob (US$ m) 283.8 364.0 726.0 701.3 908.9Imports of goods fob (US$ m) 1,090.0 1,046.0 997.3 1,266.6 1,355.2

Current-account balance (US$ m) -912.0 -763.6 -657.2 -462.0 -280.0Foreign-exchange reserves excl gold (US$ m) 651.6 725.1 715.6 819.2 998.5 a

Total external debt (US$ bn) 6,965 7,038 4,449 4,609 n/a

Debt-service ratio, paid (%) 16.4 11.4 8.3 6.0 n/aExchange rate (av) MT:US$ 13,028.6 15,447.1 20,703.6 23,678.0 23,782.3

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2002a % of totalAgriculture, fishing & forestry 23.5 Private consumption 59.0Industry 34.0 Government consumption 11.0

Manufacturing 12.6 Gross domestic investment 44.7Services 42.5 Exports of goods & services 23.5

Imports of goods & services 38.2

Principal exports 2002 US$ m Principal imports 1997 US$ mAluminium 361 Machinery & equipment 139.0Prawns 64 Vehicles, transport equipment & spare parts 113.8

Electricity 107 Fuel 92.3Cotton 21 Textiles 43.4Sugar 18 Metal products 38.9

Main destinations of exports 2003b % of total Main origins of imports 2003b % of totalBelgium 30.3 South Africa 34.5South Africa 17.3 Australia 10.4Italy 11.6 US 5.1

Spain 11.3 Portugal 5.0

a Official figures. b Based on partners' trade returns; subject to a wide margin of error.

6 Mozambique


Quarterly indicators2002 2003 20042 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Financial indicatorsExchange rate MT:US$ (av) 23,631 23,800 23,868 23,809 23,801 23,716 23,804 23,791Exchange rate MT:US$ (end-period) 23,530 23,877 23,854 23,853 23,710 23,744 23,857 23,746M1 (end-period; MT bn) 10,636 11,675 11,521 11,754 12,287 12,807 14,258 13,454M1 (% change, year on year) 19.6 15.4 14.5 14.7 15.5 9.7 23.8 14.5M2 (end-period; MT bn) 25,996 27,931 27,808 27,689 29,238 30,222 32,893 31,624.0M2 (% change, year on year) 24.7 23.0 21.1 15.1 12.5 8.2 18.3 14.2PricesaConsumer prices (2000=100) 125.3 128.0 131.7 138.0 144.4 145.3 150.1 159.2Consumer prices (% change, year on year) 20.0 15.4 9.5 10.9 15.2 13.5 14.0 15.4Sectoral trends, production (annual totals; ‘000 tonnes)bMaize ( 1,236 ) ( 1,248 ) n/aCoconuts ( 265 ) ( 265 ) n/aSeed cotton ( 50 ) ( 50 ) n/aCashew nuts ( 58 ) ( 58 ) n/aForeign trade & reserves (US$ m)Exports fobc 142.1 166.0 179.1 190.2 220.4 240.8 346.5 n/aImports fobc -307.4 -331.5 -322.7 -417.1 -391.6 -450.4 -437.7 n/aTrade balance -165.3 -165.5 -143.6 -226.8 -171.2 -209.7 -91.2 n/aReserves excl gold (end-period) 706.3 711.4 819.2 820.1 793.2 817.6 998.5 1,006.7

a Maputo. b Estimates for 2002 and 2003. c DOTS.

Sources: IMF, International Financial Statistics; Direction of Trade Statistics; UN Food and Agriculture Organisation.

Mozambique 7


Outlook for 2004-05

Political outlook

Political competition will increase steadily as all political parties gear up forlegislative and presidential elections, due in December 2004. Despite a series ofcorruption and murder scandals in which senior party figures are alleged tohave been involved, the ruling party, Frente de Libertação de Moçambique(Frelimo), is not expected to lose either the presidential or the legislativeelection in 2004. Frelimo has numerous advantages over other parties,including its superior administrative capacity, tradition of unity and access tostate resources. It also faces a weak and disorganised opponent, the mainopposition party, Resistência Nacional de Moçambique (Renamo). AlthoughRenamo enjoys widespread support in the central and northern provinces andwill pick up the votes of those who are disillusioned with Frelimo, its weakinstitutional capacity and the vote-splitting potential of a newly createdopposition party, Partido para a Paz, Democracia e Desenvolvimento (PDD),mean that it has little chance of winning the elections.

Competition and manoeuvring within Frelimo will increase during theremainder of 2004 as the party prepares for the retirement of the president,Joaquim Chissano, after two elected terms as president. Frelimo’s presidentialcandidate in 2004, Armando Guebuza, is already exerting his authority. This iscausing some turmoil in the party, as the centre of power has shifted awayfrom those close to the current administration towards allies of Mr Guebuza.Mr Guebuza's candidacy for the presidency also bodes ill for the quality ofgovernance and political pluralism. His selection over the younger or moremoderate candidates preferred by Mr Chissano and some party leadersrepresented a victory of the party's old guard over the government.Mr Guebuza is likely to adopt a less conciliatory approach towards Renamothan Mr Chissano, who has a consensual style of governing. He is associatedwith Frelimo's hardliners, and a government led by him, although probablymore cohesive than the current one, will be less inclusive. Although there haverecently been concerns regarding Mr Guebuza's health, it is unlikely that a newFrelimo candidate will be chosen to replace him as the presidential candidate.

Frelimo's recent loss of public support and the prospect of a tight election maycompel Mr Guebuza to become more confrontational towards Renamo in theoutlook period. He has already issued a warning to Renamo regarding itsremnant militias, which have intimidated government officials. In the currentpolitical environment, a more confrontational stance would not favourpluralism or stability. The emergence of the PDD led by Raul Domingos, aformer parliamentary leader of Renamo, raises the prospect of splittingRenamo's vote in the central and northern regions, its traditional strongholds.But Mr Domingos’s party has still to demonstrate the political, administrativeand financial capability to mount a serious challenge—his party is not expectedto challenge the current two-party system. The newly created União para aSalvação de Moçambique (Usamo) may take some votes from Frelimo, but isnot expected to have a major impact on the election results.

Domestic politics

8 Mozambique


Donors are apprehensive about the political instability expected in the run-upto the elections and about the more authoritarian and less inclusive style ofgovernment that is expected to follow under Mr Guebuza. Nonetheless, theystill expect broad continuity in terms of policy, despite the change of leadership.As a result, donor support will remain strong, owing to sound economicpolicies, favourable conditions for economic growth and poverty reduction,and the belief that Mozambique is a success story that the internationalcommunity needs to support. Relations with South Africa will remain close,driven by trade and investment. Feelings towards Zimbabwe will remainstrained, despite outward appearances of support, owing to the instabilitycaused by the chaotic policies of that country's president, Robert Mugabe. Thereis some concern in Portugal regarding the effect that the election of Mr Guebuzawould have on bilateral relations, as he is widely known to have a tougherattitude to the former colonial master.

Economic policy outlook

The government's main economic policy goals in 2004-05, as outlined in itspoverty reduction strategy paper (PRSP), are to maintain high and sustainablerates of poverty-reducing growth, ensure macroeconomic stability, and improvesocial services. The IMF's Article IV Consultation, published in March 2004,and the three-year, US$16.6m poverty reduction and growth facility (PRGF)programme approved in June 2004 indicated confidence in the government’smacroeconomic programme and the implementation of its poverty reductionstrategy. However, further efforts to implement reforms and addressweaknesses are needed if progress on poverty reduction and growth is tocontinue. A particular concern is improving the efficiency of social spending,which has increased substantially in recent years, as well as reducing red tapeand other obstacles to private-sector activity. Progress will be slow given weakinstitutional capacity and some level of political obstruction.

The joint review of implementation of the poverty reduction strategy paper(which is known by its Portuguese acronym, PARPA), carried out by thegovernment and donors, ended with a Memorandum of Understanding thatsets forth the details of direct budgetary support and will serve to alignsignatory programme aid from donors with the government's planningprocedures and implementation cycles. It sets forth the principle that donorsshould not include in their bilateral agreements any additional conditions orreporting requirements to those agreed upon in the Memorandum. In thecoming years, a larger fraction of development assistance will come in thisform, and improvements in public-expenditure management will be necessaryto ensure the efficient use of funds, as well as vigilance on the part ofparticipating donors to ensure accountability.

Under the government's medium-term expenditure framework (MTEF),budgetary resources are projected to increase in real terms in 2004-05, owing toincreased domestic revenue. This will be helped by measures first introduced in2002, including a new income tax, which covers all income rather than just

International relations

Policy trends

Fiscal policy

Mozambique 9


salaries, and the new fiscal incentives code, which ends discretionary taxbreaks for investors—the IMF had considered these to be overly generous.However, progress in attaining the MTEF's targets will be mixed, as it will bedependent on achieving improvements in the state's capacity for financialmanagement.

The 2004 budget increases total public spending, but at a slower rate than inrecent years. This indicates that the era of large year-on-year increases in publicspending is over for the time being. The government's programme projects abudget deficit of 3.8% of GDP in 2004, declining to 3.5% in 2005, as domesticrevenue mobilisation measures continue and current expenditure is containedby reducing the wage bill relative to GDP. Owing to the potential for fiscalslippage arising from the December elections, the Economist Intelligence Unitis forecasting a budget deficit of 4% in 2004, falling to 3.7% in 2005. Improvedefficiency in expenditure should also contribute to an increase in thepercentage of domestically-funded expenditure. During 2004-05 the fiscaldeficit is expected to be largely covered by donor inflows, and less so byTreasury-bill issuance. The government will seek to reduce domestic debtissuance to lessen the pressure on interest rates.

In 2004 Banco de Moçambique (BDM; the central bank) has tried to offset theinflationary pressures generated in 2003 by the poor harvest and theappreciation of the rand, the currency in which most of the country's importsare denominated, by keeping tight control on money supply growth. In linewith declining inflation, nominal interest rates have been falling, from 26.7% in2002 to 24.7% in 2003 and are expected to continue doing so over 2004-05,although real interest rates are forecast to decline only slightly during theforecast period. The banking crises, caused by the failure of two former state-owned banks, will continue to have a lingering effect on monetary policy. Therecapitalisation of the two banks and part of the budget deficit is beingfinanced by T-bills and the government will have to balance its need to attractfunds through high interest rates with its desire to reduce its T-bill exposurethrough low interest rates.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.9 4.9 4.3OECD 1.6 2.1 3.5 2.8EU25 1.2 1.1 2.2 2.4Exchange rates¥:US$ 125.3 115.9 111.8 108.5US$:€ 0.945 1.132 1.202 1.293SDR:US$ 0.772 0.714 0.688 0.662

Financial indicators¥ 2-month private bill rate 0.10 0.03 0.03 0.10US$ 3-month commercial paper rate 1.70 1.10 1.38 3.00

Monetary policy

International assumptions

10 Mozambique


International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Commodity pricesOil (Brent; US$/b) 25.0 28.8 33.5 26.0Gold (US$/troy oz) 310.3 362.8 421.3 375.0Food, feedstuffs & beverages

(% change in US$ terms) 12.7 6.6 10.6 -0.7Industrial raw materials (% change in US$ terms) 2.2 12.7 18.8 -0.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is expanding at its most rapid pace for about 20 years. Weforecast that world GDP growth (on a purchasing power parity basis) willaccelerate from an estimated 3.9% in 2003 to an extremely strong 4.9% in 2004,before moderating to a still robust 4.3% in 2005. The price of Mozambique'smain export, aluminium, is forecast to remain strong, owing to buoyantdemand, with prices higher than in the past five years. After exceptionally highinternational oil prices in 2004, we forecast a fall in oil prices in 2005, whichwill help to reduce the import bill.

The strong real GDP growth of recent years will continue over the forecastperiod, driven by output from the industrial mega-projects that are coming onstream, as well as by investment and robust performance in a range of othersectors. In 2004 real GDP growth is expected to rise to 8.2%. Expansion will besupported by recovery in agriculture, after two consecutive years of drought inthe southern and central regions; the start of gas exports to South Africa via thenew gas pipeline from Mozambique's Temane and Pande gasfields; and higherproduction from the Mozal aluminium smelter. In 2005 real GDP growth willslow to 7.1% as the output growth of the mega-projects peaks. However, therewill be expansion in other, more labour-intensive sectors, including agriculture,where some cash crops are now beginning to show greater dynamism, and invarious mining projects, which will benefit from investment. Services—Mozambique's largest sector, which accounts for around 43% of GDP—willbenefit from higher domestic demand and from growth in local companiessupplying this market, which has tended to rely on imports. The growth of thetransport and communications sector will also pick up as private investment inports and railways, as well as mobile telecommunications, increases.

Despite the high growth rates forecast in 2004-05, there is some concern thatthe economy is growing at two speeds. Although growth is occurring in new,dynamic, capital-intensive sectors, with the help of large inflows of foreigndirect investment, there is evidence that economic activity is faltering intraditional sectors. Agriculture and fisheries are underperforming, leading toweak growth in purchasing power in rural areas. In addition, robust economicgrowth will disguise serious supply-side constraints in the economy. Theseinclude high transaction and unit costs caused by bureaucratic obstruction,weak competition, low sales volumes, and the small domestic market.

Economic growth

Mozambique 11


If fiscal and monetary policies follow the broad goals set out by thegovernment, and public expenditure does not surge before the presidential andlegislative elections, average inflation should fall to around 12.8% in 2004. Thisassumes that favourable weather will help to keep food prices under control. Aforecast steadying of the metical against the rand in 2004—it will depreciatemore slowly than over the past two years owing to large donor inflows and adepreciating trend in the rand—will also ease inflationary pressure, as it willreduce imported inflation from South Africa. In 2005 the newly installedgovernment is expected to maintain relatively tight fiscal and monetarypolicies. Assuming normal weather and the continued depreciation of themetical against the rand (which, in turn, is forecast to depreciate against the USdollar), average inflation is forecast to fall to 10% in 2005.

The metical, which remained virtually unchanged against the US dollar during2003, because of the weakness of the dollar caused by the large US current-account deficit, among other factors, has remained stable in the first half of2004, and is expected to appreciate slightly during 2004-05. The strength of themetical is the result of higher export proceeds and donor inflows, whichremain high. We forecast an average exchange rate of MT23,612:US$1 in 2004and MT23,650:US$1 in 2005. The metical will depreciate moderately against therand during 2004-05—South Africa is Mozambique's largest trade partner andlargest source of imports—following two years in which the currency has fallensharply, owing to the appreciation of the rand due to strong macroeconomicfundamentals in South Africa.

We forecast that the current-account deficit after grants will narrow to 1.9% ofGDP in 2004, down from 6.4% in 2003. In 2005, we expect the current-accountdeficit to begin widening again, rising to 6.1%. The performance of the externalaccount will continue to be influenced by developments in the mega-projectsover the forecast period. Exports will be boosted in 2004 by the contribution ofthe mega-projects. The import content related to these projects—the expansionof the Mozal aluminium smelter and the building of a gas export pipeline toSouth Africa—has been large, but will fall now that the building stage has beencompleted, although new projects are in the investment pipeline, includingprojects in mining and transport. Overall, the deficit on the trade balance willnarrow sharply in 2004 before rising in 2005.

The composition of exports is changing; they are increasingly dominated by thenew, capital-intensive export sectors—particularly aluminium and gas—whichhave overtaken agriculture and fisheries as the main exports. Electricity exportswill also rise substantially, thanks to higher prices following a long-runningcontract dispute over export sales to South Africa. In 2005 exports will bebolstered by the first full year of gas exports, which may be worth US$150mper year. Import growth will edge down in 2004 as capital investmentassociated with the construction of the mega-projects comes to an end. By2005, however, imports will rise sharply, owing to the expected impact of otherlarge projects and the generally import-intensive nature of growth in theeconomy due to domestic supply weaknesses. The services account willremain in deficit throughout 2004-05, mainly because of the cost of services

Exchange rates

External sector

Inflation

12 Mozambique


imported for Mozal and the gas pipeline, along with the country's heavy trade-related costs, although the transfers account will be positive, thanks tocontinuing high levels of donor inflows. Debt relief granted under the heavilyindebted poor countries (HIPC) initiative will lower debt-service payments,reducing income debits. Donor support will keep the current transfers balancestrongly in surplus in 2004-05.

Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 7.7 7.1 a 8.2 7.1

Consumer price inflation (av) 16.8 13.4 a 12.8 10.0Short-term interbank rate 26.7 24.7 a 22.6 19.6Government balance (% of GDP) -7.9 -4.9 -4.0 -3.7

Exports of goods fob (US$ m) 701 909 1,298 1,354Imports of goods fob (US$ m) -1,267 -1,355 -1,369 -1,621

Current-account balance (US$ bn) -462 -280 -100 -393Current-account balance (% of GDP) -12.8 -6.4 -1.9 -6.1Exchange rate MT:US$ (av) 23,678 23,782 23,612 23,650

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

The controversy surrounding Mozambique’s Cardoso case, involving murder,fraud and judicial interference, has continued to dominate the political scene. Inthe latest development, Anibal "Anibalzinho" dos Santos Junior, the leader of ahit squad convicted of murdering the country’s most famous investigativejournalist, Carlos Cardoso, in November 2000 (January 2001, The politicalscene), escaped from prison on May 9th. This is the second time thatAnibalzinho has escaped, the first escape having occurred prior to hisscheduled testimony in the Cardoso case in 2002 (October 2002, The politicalscene). According to court testimony, this second escape was facilitated by high-level political interference by the elite of the ruling party, Frente de Libertaçãode Moçambique (Frelimo), including the president's son, Nhimpine Chissano,

Anibalzinho escapes fromMozambique

Mozambique 13


who is alleged to have been paymaster for the murder. Since Anibalzinho'srecapture, security had been increased at Maputo’s maximum security prisonand a court case has been opened against seven prison officials charged withallowing the escape. They were later acquitted when a judge ruled that theywere pawns taking the blame for senior Frelimo figures. The motivation for thelatest escape appears to have been to prevent Anibalzinho's testimony, whichwould have shed light on the Cardoso murder and the related Banco Comercialde Moçambique (BCM) fraud, which Mr Cardoso had been investigating.

Anibalzinho was finally recaptured on May 24th in Canada, where theauthorities had been tipped off by Interpol. His return to Mozambique will notbe simple, as there is no extradition treaty between the two countries. Inaddition, the fugitive has applied for refugee status, which entitles him to anindependent hearing, legal counsel, privacy and access to a lengthy appealsprocess. This means that his return to Mozambique could be delayed formonths, if not years. It is still not known who arranged Anibalzinho’s release,which required considerable organisation, including a flight to Canada on afalse passport. Nhimpine Chissano has again been blamed. This latestdevelopment has further eroded public confidence in Frelimo and will givecredence to the perception that the elite considers itself above the law and iswilling and able to flout state institutions openly.

The BCM fraud case, the longest trial in Mozambican history, ended on June15th when the Maputo City Court convicted seven people, handing downprison sentences of between eight-and-a-half and 14 years, while acquitting tenother suspects because of a lack of evidence. The case has been running since1996, when BCM was defrauded of US$14m at the time when it was privatisedand sold to a Portuguese banking group. The public prosecutor’s office madelittle headway in the investigation because of corruption within it. The leadprosecutor, Diamantino dos Santos, subsequently fled after being tipped offabout his impending arrest and is still at large although he has communicatedwith the media and the judicial authorities, admitting that he had been paid toobstruct the investigation and offering to reveal more about the case and whowas involved in return for a plea bargain. Several of the figures convicted in theCardoso case stood trial in the BCM case, as Mr Cardoso’s murder was orderedwhen his revelations concerning the bank fraud became too embarrassing.

Banco Comercial de Moçambique

1996

Privatisation of a majority stake in Banco Comercial de Moçambique (BCM), whichwas acquired by a group of foreign investors led by Banco Mello of Portugal.

2000

BCM is declared insolvent, amidst allegations of fraud and plundering. The mostprominent independent journalist, Carlos Cardoso, is murdered in Maputo whileinvestigating the banking fraud in which senior Frente de Libertação de Moçambique(Frelimo) figures were implicated.

Anibalzinho is recaptured inCanada

Banco Comercial deMoçambique fraud case ends

14 Mozambique


2001

A banking crisis follows the collapse of two privatised state banks that had beenlooted by the political elite. The subsequent bail-out costs the country the equivalentof 4% of GDP for the state's share of a recapitalisation.

2003

The Cardoso murder trial ends; six people are found guilty. The trial has enormouspolitical implications, as senior Frelimo figures were alleged to have been involved.The president's son, Nhimpine Chissano, is forced to testify at the trial after severalof the accused name him as the paymaster of the murderers.

2004

Longest bank-fraud trial ends with the conviction of seven people.

Since 2000 an ad hoc parliamentary commission has been revising theconstitution. A consensual draft was supposed to have been completed by May10th, but Frelimo asked for an extension to May 31st after a failure to reach anagreement with the main opposition party, the Resistência Nacional deMoçambique (Renamo). This was largely because Frelimo wants the body incharge of deciding whether statutory and administrative acts are in line withthe constitution to be called the Constitutional Council, whereas Renamowants the body to be called the Constitutional Court. The revised constitutiondoes not alter the system of governance and proposes minor changes, such asmaking it possible to have dual nationality and greater individual freedoms.Despite the disagreements, the chairman of the ad hoc commission,Hermenegildo Gamito, remains optimistic that the revised constitution could bepassed before the end of 2004.

Following its poor performance in the municipal elections in November 2003(January 2004, The political scene), and in preparation for the December 2004presidential and legislative elections, Renamo has made a number of newappointments. On April 14th David Alone, the head of the private office of theRenamo leader, Afonso Dhlakama, was sacked. The press claimed thatMr Alone had been questioned by an internal party commission and accusedof collaborating with Frelimo. Similar language has been used in the past whena party member has been seen to represent a challenge to Mr Dhlakama.Renamo has also replaced José de Castro, formerly its lead delegate on theComissão Nacional de Eleições (CNE), which controls the country’s electoralprocess. As a replacement, Renamo proposed Raimundo Samuge, the head ofits mobilisation department and a close advisor to Mr Dhlakama. Mr de Castrohas long been a controversial figure and his tenure at CNE since 1994 isremembered for his obstructiveness. Although the significance of the individualchanges is not evident, it appears that Renamo is preparing to mobilise itsinternal party machinery in advance of the presidential and legislative electionsand that Mr Dhlakama has consolidated internal control over the party.

Voter registration for the upcoming presidential and legislative elections startedon June 28th and will end on July 15th. Voter registration was to have begun onJune 15th, but the government announced the day before that it would be

Preparations for generalelections are under way

Internal reshuffle takes placewithin Renamo

Stalemate prevails overconstitutional amendments

Mozambique 15


postponed, owing to logistical delays in the delivery of election materialsordered from South Africa. The updating of the voters' roll is a logisticallycomplex exercise involving the hiring and training of 2,494 election brigades bythe authority in charge of the elections, the Secretariado Técnico deAdministraçao Eleitoral (STAE). A total of 700,000 voters are to be added to theelectoral register; this includes new voters who have come of age since the lastpolls, as well as those who have changed address or lost their electoral identitycards. The date for the next elections, Mozambique’s third since the end of thewar in 1992, has been set for December 1st-2nd 2004.

A new political coalition, União para a Salvação de Moçambique (Usamo), hasbeen formed to contest the next elections. Usamo is composed of five smallparties. Significantly, it is led by Julio Nimuire, the former secretary-general ofthe Associação Moçambicana dos Desmobilizados de Guerra (Amodeg, theMozambican association of war veterans). A previously compliant Frelimobody, Amodeg has been raising its political profile in recent years, voicingcomplaints that the government has not done enough on behalf of warveterans and accusing it of corruption. However, it is unlikely that Usamo willenjoy substantial electoral success, and it is more likely that Mr Nimuire isseeking to increase his leverage with Frelimo. There are no signs yet that thewar veterans are, or are likely to become, a seriously disruptive group.

Armando Guebuza, Frelimo’s presidential nominee for the next election, whois, in effect, already acting as Mozambique's new leader, issued a warning toRenamo over the status of its remnant militia forces in June, thereby revealing aharder line than that adopted by the current president, Joaquim Chissano.These groups and their exact relationship with Renamo have been an area ofcontention since the end of the war and the first elections in 1994. At that time,Renamo retained small groups of armed solders, who were held back from thedemobilisation process, as did Frelimo. Gradually, the powers of these ex-soldiers and Renamo’s control of areas of Sofala province, which were its war-time strong-hold, have given way to state authority. However, Renamo groupswith access to weapons have occasionally intimidated Frelimo or governmentofficials. Renamo claims that Mr Dhlakama is entitled to an executive securityforce under the terms of the 1992 Rome peace agreement. Frelimo has arguedthat this privilege expired with the end of the peace process. If not handleddelicately, the issue has the potential to spin out of control and have negativeconsequences. The last time Frelimo and Renamo engineered a showdown ona day of national protests, in 2000, over 100 deaths occurred in what was themost serious violence since the end of the civil war (January 2001, The politicalscene). A Renamo official, Viana Magalhaes, reacted to Mr Guebuza’scomments by saying that they were bellicose and a harbinger of the style ofgovernance that Mr Guebuza will use if he wins the presidential election.

The sudden hospitalisation of Mr Guebuza on May 7th has raised concernsregarding his health. Mr Guebuza’s has suffered from hepatitis in the past, as aresult of which he was sidelined from the political scene for some time. Thereare concerns among political observers that the hospitalisation may have beendue to a recurrence of hepatitis rather than overwork, as officially stated by the

A political coalition is formedahead of presidential election

Armando Guebuza issues awarning to Renamo

Frelimo's presidentialcandidate is hospitalised

16 Mozambique


government, fuelling speculation that an alternative presidential candidate toMr Guebuza may need to be found for the December election. Although hewas discharged from the hospital after one night, Mr Guebuza had to cancel atrip to Portugal, which was scheduled for May 11th.

The then Portuguese prime minister, José Manuel Durão Barroso, undertook ahigh-profile state visit to Mozambique at the end of March at the head of a 170-strong delegation. Mr Barroso’s first official visit allowed him to make contactswith Frelimo officials, particularly Mr Guebuza, who is alleged to be tougher inhis attitudes towards Portugal than Mr Chissano. Portugal's relations withMozambique remained poor after independence and were not put on a stablefooting until after the end of the civil war. Portugal subsequently made asustained diplomatic push and relations warmed considerably from the mid-1990s, involving close business, political, cultural and personal exchanges.There is some concern about what changes Mr Guebuza’s presidency will bringto this relationship. Talks were also held with Mr Dhlakama. Although cordial,Mr Barroso has kept relations with Renamo low key and discreet, in recognitionof the fact that Frelimo will remain the ruling party for the foreseeable future.

The Portuguese government is highly sensitive to any perceived bias in favourof Renamo; the Portuguese military intelligence, elements of the Catholicchurch, conservative businessmen who lost property and the revanchist ex-settler movement are all groups whom Frelimo has traditionally accused ofbias toward Renamo. These concerns, whatever their relevance in the past, areconsidered outdated now, and successive Portuguese governments have allbeen at pains to deal with Frelimo equitably and transparently. Frelimo hasfound it useful to keep old grievances towards Portugal alive as this provides anarea of leverage in relations. Mr Guebuza made a return visit to Portugal inearly June—following the cancellation of the trip scheduled for May when hewas hospitalised—where he again held talks with Mr Barroso and Portuguesebusinessmen, although he declined to meet the minister of defence, PauloPortas, alleging that Mr Portas was too pro-Renamo.

Economic policy

On June 21st the IMF approved a three-year poverty reduction and growthfacility (PRGF) worth US$16.6m. This is a lower sum than in previous PRGFs,and indicates that the IMF is moving from its role as a central financialsupporter to being a supporter of good economic policies, with othermultilateral and bilateral donors increasing their funding role. The release of thefirst tranche of funds was scheduled for July 6th, following a World Bankreview of the report on progress made in implementing the poverty reductionstrategy paper (PRSP). The previous PRGF expired in June 2003 and agreementon a successor programme was delayed, owing to the IMF's policy that anycountry that has used its funds for a prolonged period—at least two consecutivelending programmes—has to undertake an official assessment of what has beenachieved. Mozambique has hosted IMF and World Bank programmes for 16years and the ex-post assessment was finally completed earlier this year, thefirst such exercise undertaken for any Fund member (April 2004, Economic

Portugal adjusts to relationswith Mr Guebuza

The IMF approves a new PRGF

Mozambique 17


policy). The report provides a useful historical review of achievements to dateand ongoing vulnerabilities.

The board of the IMF discussed whether further engagement withMozambique should be pursued outside a formal programme such as a PRGF,in recognition of the fact that this facility was initially meant to be a transitoryprogramme to stabilise an economy and establish the basis for self-sustaininggrowth. Some members of the board argued that the traditional function of aPRGF, in terms of signalling confidence in the economic policies of a recipientcountry, could be achieved without such a programme. However, theMozambican authorities were anxious to retain the PRGF mechanism, whichunderpins the extensive foreign assistance the country receives, stating that theydid not want to be a test case for a new IMF policy shift. The final result is asymbolic low-access programme, under which Mozambique will receive onlyUS$5.6m per year, equivalent to less than 1% of the annual foreign assistancereceived by the country.

The PRGF envisages real GDP growth of 8.4% in 2004, up from 7.1% in 2003,boosted in large part by the mega-projects, as both the new gas pipeline toSouth Africa from Mozambique's Temane and Pande gasfields and the newlyexpanded Mozal aluminium smelter reach full production. The IMF projectsthat real GDP growth will fall slightly in 2005, to a still robust 6.8%. The PRGF’sfiscal programme envisages a reduction in the fiscal deficit to 3.8% in 2004,down from 4.9% in 2003. Total revenue is forecast to rise to 14.6% of GDP in2004, up by 0.3%.

Despite approving the new PRGF, the Fund, like other donors, still has seriousconcerns regarding the financial sector, specifically loan recovery from twofailed banks, which had been looted by the state elite, costing the equivalent of4% of GDP in a government-led bail-out. Although donors make periodicreference to the issue, the matter appears to be at an impasse for politicalreasons. The PRGF was approved nonetheless, as loan recovery was not abinding performance condition of the Fund's programme. The IMF has noted anumber of other concerns and priorities that are to be addressed over the 2004-06 period, including the consolidation of macroeconomic and fiscal stability, aswell as priority structural reforms. These include the following.

Strengthening the financial system: Priorities are to expand access tofinancial services and ensure the health and competitiveness of the sector.Diagnostic reviews of the four largest banks are to be completed under theWorld Bank’s Financial Sector Advisory Programme (FSAP). Banco deMoçambique (BDM, the central bank) is to improve its monetary and exchange-rate management, while reducing inflation and limiting intervention in theforeign-exchange market.

Fiscal consolidation: The authorities are to achieve fiscal targets, which willrequire restraint with the state wage bill and non-essential outlays, as well as astrengthening of revenue collection and a tightening of expendituremanagement. The domestic primary deficit is to be reduced to 3.3% of GDP in2004, down from an estimated 4% in 2003, and to 3.1% in 2005; the efficiency

The IMF notes concerns

The PRGF mechanism isretained

18 Mozambique


of public expenditure needs to be improved if poverty reduction objectives areto be achieved (January 2004, Economic policy).

Remove impediments to private-sector development: Mozambique needs tolower the cost of doing business, increase competitiveness and diversifyexports. Despite the high headline rate of growth, performance in a range oftraditional and new, labour-intensive sectors of the economy is below potential,owing to the high cost of doing business arising from labour-market rigidities,weaknesses in the justice system (including contract enforcement) and highbureaucratic costs.

From March 24th to April 5th the government participated in an extensive jointreview exercise with the World Bank and the 14 bilateral donors who areproviding direct budgetary support: Belgium, Denmark, the EuropeanCommission, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway,Portugal, Sweden, Switzerland and the United Kingdom. Donors who haveagreed to provide direct support to the state budget need to evaluate progress inachieving the government’s development objectives, as well as receiveassurances that funds are being used effectively and can be accounted for. Thisis an important process for both sides as the government wants to raisebudgetary support as a portion of total aid to 60%, from 27% currently. Budgetsupport has risen to US$160m in 2003 from US$156m in 2002 and is expectedto reach US$167m in 2004. Donors have been monitoring assistance throughthe Performance Assessment Framework (PAF), a matrix of indicators coveringhealth, education and other sectors. However, the joint review extends to theentire development effort, reviewing progress and policy implementation underthe Plano de Acçao para a Reduçao de Pobreza Absoluta (PARPA), the budgetand the Economic and Social Plan (PES).

The overall assessment is that implementation of policy and objectives hasbeen positive, particularly in relation to the macroeconomic programme,economic performance and poverty reduction. Outcomes are positive in termsof the PAF indicators, despite some shortfalls, although there is concern aboutstructural reforms in a range of sectors including the judicial system. Anothercause of concern is the lack of progress in loan recovery in the banking sector,including an unfulfilled commitment to begin a forensic audit of the lootedformer state bank, Banco Austral. The joint review ended with the signing of anew Memorandum of Understanding between the government and aidpartners, which sets out the details for direct budgetary support.

On July 6th the World Bank approved a US$60m credit to support thegovernment's poverty reduction strategy for 2004. Approval for this creditallowed the first tranche of PRGF funds to be disbursed by the IMF. Thepoverty reduction support credit (PRSC-1) will help to increase capacity in thepublic sector so as to maintain macroeconomic stability and strengthen public-expenditure management. It aims to reduce the constraints affecting theinvestment climate and will finance priority actions aligned withMozambique's poverty reduction strategy, as agreed with all developmentpartners within the framework of the joint review of which the PRSC is part.Through the PRSC-1 programme, the World Bank is part of the group of donorsproviding direct budget support to the government.

The business environmentremains adverse

Joint review of PARPAimplementation is complete

World Bank approves povertyreduction support credit

Mozambique 19


The domestic economy

Economic trends

Average annual inflation has fallen slowly during the first half of 2004,declining to 12.5% in May from 17.4% in January, while accumulated inflationrose to 6.5% from 2.9% over the same period. Although something of animprovement from the accumulated rate of 7.7% for the equivalent period lastyear, Mozambique is still experiencing relatively high inflation. Furthermonetary tightening will be necessary if the current target of 12.9% annualaverage inflation for 2004, agreed with the IMF, is to be achieved as seasonalprice growth is stronger in Mozambique in the second half of the year. Furtherprice pressure in the food sub-sector can be expected, owing to intermittentfood supplies. In recent months imported inflation has risen, partly because ofrising international oil prices. Domestic fuel prices, which are regulated at thethree ports of entry—Maputo, Beira and Nacala—rose in late April, with theprice of a litre of leaded petrol rising by 9.2%, to give a year-on-year increase of30%. Petrol prices also rose in June, by 3.5%.

Consumer prices, 2004 (Maputo)(% change)

Annual average Accumulated MonthlyActual inflation Jan 17.4 2.9 2.9 Feb 15.3 3.4 0.5 Mar 13.5 4.4 1.0 Apr 13.6 5.8 1.3 May 12.5 6.5 0.6

Target inflation IMF 12.9 – –

Source: Banco de Moçambique.

In recent months the metical has depreciated by 2.7% against the rand reachingMT3,605:R1 in June. The Ministry of Finance forecasts that the rate will fall toMT3,700:R1 by the end of the year. This would be a sharp turnaround from thesituation in 2003, when the metical fell by nearly 29% against the rand, leadingto significant imported inflation.

The metical has appreciated by 1% against the US dollar in the first half of 2004,reflecting the weakness of the US dollar arising from the persistent, large UScurrent-account and budget deficits, and Mozambique's strong exportperformance. Greater stability in the exchange rate against the dollar mayreverse the flight from metical-denominated accounts to US-dollar accounts inthe Mozambican banking system, which was experienced over the last year. Itis official government policy to broaden the monetary base by encouraging theuse of metical-denominated bank accounts and business transactions in whatremains a high dollarised economy (over 50% of all bank deposits weredenominated in foreign currency in 2002).

Inflation is high but falling

Small movements occur inmetical exchange rate

20 Mozambique


Exchange rates, 2004(av)

MT:Rand MT:US$Jan 3,510 23,688Feb 3,531 23,840Mar 3,613 23,844Apr 3,673 23,829May 3,520 23,747Jun 3,605 23,436


Economic growth has continued to be robust, with real GDP growth for 2003now estimated by the authorities to have risen by 7.1%, up slightly from the 7%estimated earlier. Preliminary disaggregated data confirm that strong outputgrowth was experienced across manufacturing, construction, services andagriculture. Strong growth is expected in transport and communications in2004, owing to investment in the ports and rail systems, as well as mobiletelecommunications, all of which have secured foreign investors.

Preliminary results from a new government survey, which has yet to befinalised, indicate that inequality has increased in Mozambique in recent years,even though concurrent findings show that poverty has fallen. The latest reportdraws on the data from the recent household income survey, undertaken over2002-03, and compared with an earlier baseline survey for 1996-97. The reportindicates that poverty has fallen dramatically between these two periods (April2004, The domestic economy), but that inequality has increased.Unsurprisingly, strong regional variations are apparent, with inequality lower inrural than urban areas, and in the northern and central areas, which have seencomparatively less investment and development. Inequality has remainedrelatively stable in all areas outside of the south over the six years between thetwo surveys. Maputo City has the greatest inequality.

Inequality(Gini co-efficient unless otherwise indicated)

1996/97 2002/03Urban-rural inequality Urban 0.47 0.48 Rural 0.37 0.37 National 0.40 0.42Regional inequality North 0.38 0.39 Central 0.37 0.39 South (excl Maputo City) 0.40 0.44 Maputo City 0.46 0.52Poverty (%) Urban 62.0 51.5 Rural 71.3 55.3 National 69.4 54.1

Note: Inequality is measured by the Gini co-efficient where 0 equals perfect equality and 1 perfectinequality.

Source: Government of Mozambique, National Household Survey.

Economic growth is robust

Poverty has fallen, butinequality has increased

Mozambique 21


The Swiss-based World Economic Forum (WEF) released its AfricaCompetitiveness Report 2004 at the Africa Economic Summit held in Maputo inearly June. To gain insight into the competitiveness situation, the WEF conductsannual Executive Opinion Surveys, which aim to assess the strengths andweaknesses faced by the business community. The Growth CompetitivenessIndex (GCI) identifies three key factors affecting growth: the quality of themacroeconomic environment, the state of a country's institutions, and itstechnological level. The GCI uses a combination of hard data supplemented bysurvey data in order to derive three sub-indices, which are then aggregated togive the overall competitiveness index. Mozambique ranks 20 out of 25 NorthAfrican and Sub-Saharan economies, scoring worse than all its SouthernAfrican neighbours, save for Zimbabwe.

Growth Competitiveness Index and sub-index rankingsIndex Public institutions Macroeconomic environment Technology

Botswana 1 1 1 4Tunisia 2 2 2 3

South Africa 3 5 3 1Mauritius 4 6 9 2

Namibia 5 7 7 5Gambia 6 4 5 11Egypt 7 8 8 6

Morocco 8 12 4 7Tanzania 9 9 14 12

Ghana 10 10 11 14Algeria 11 11 6 20Malawi 12 3 23 19

Senegal 13 15 10 15Uganda 14 18 12 10

Kenya 15 21 15 8Nigeria 16 24 13 13

Zambia 17 13 22 16Cameroon 18 22 16 18Ethiopia 19 14 18 24

Mozambique 20 16 20 17Madagascar 21 23 17 21

Zimbabwe 22 19 25 9Mali 23 17 19 23Angola 24 20 24 22

Chad 25 25 21 25

Source: World Economic Forum, Africa Competitiveness Report 2004.

Agriculture

Revised official data have confirmed that the agricultural sector performedstrongly in 2003, particularly in what were previously less prominent cashcrops, such as tobacco, tea and sugar. The primary grain food-crop sectorincreased the most, rising to a reported 1.8m tonnes according to governmentsources, up from 1.4m tonnes the year before, and projected to rise to 2mtonnes in 2004. This indicates a strong recovery from two consecutive years of

Agriculture records stronggrowth in 2003

Mozambique is ranked poorlyfor competitiveness

22 Mozambique


drought; in 2003 drought conditions primarily affected the dry southernprovinces, while the northern provinces, the main surplus growing areas,experienced normal conditions. The export cash crop sector performed strongly,save for cotton, where production declined to 54,000 tonnes from 84,000tonnes in 2003. The cashew sector performed well, growing by 27%, eventhough a decline had been forecast earlier. Tobacco production increased from4,000 tonnes in 2000 to 37,330 tonnes in 2003 and is expected to reach 45,000tonnes in 2004, reflecting the opportunities now available following thecollapse of tobacco in Zimbabwe. Owing to higher production, a tobaccoprocessing plant is currently under construction in the western Tete province.Although agricultural production data can be unreliable, the latest figures areconsistent with a recent famine early warning report for food crops and aninternal ministry survey for cash crops undertaken with the support of theUniversity of Wisconsin.

Agricultural production(% increase over previous year)

2003Food cropsMaize 5Cassava 4Sorghum 26Millet 61Cash cropsCotton -30Tea 10Sugar 22.4Cashew nuts 27.0Tobacco 63.5

Source: Government of Mozambique.

Sugar production has continued to experience robust growth, on the back ofheavy foreign investment in the sector in recent years, and is now the largestagro-industrial sector in Mozambique, directly employing over 17,000 people infour mills and related companies. A further 10,000 people are estimated to beemployed indirectly. Production was estimated at 212,000 tonnes in 2003, thehighest level since independence, and is expected to rise to 254,000 tonnes in2004, worth an estimated US$29m. After satisfying domestic demand,estimated at 125,000 tonnes, sugar exports may reach 129,000 tonnes this year.Part of these exports will make use of preferential sugar export quotas thatMozambique has for the EU and US markets. Much of the growth in sugarproduction has come from Marromeu in northern Sofala province, whichborders the Zambezi River delta, and hosts the largest of the four producingsugar mills in Mozambique, following a rehabilitation that cost US$130m.Marromeu is expected to produce about 90,000 tonnes of sugar this year.Marromeu’s Mauritian owners, the Sena Sugar Company, are also consideringfurther investment to rehabilitate the long-defunct Luabo sugar mill in centralZambezia province, which is part of the concession the company was grantedwhen it purchased Marromeu. It is not yet clear if there is a firm commitmentto develop the Luabo mill, which would require investment of US$60-80m. TheMozambican authorities have announced that talks are under way with a

The sugar sector is booming

Mozambique 23


group of South African investors regarding the possible development of a sugarmill at Buzi, south of Beira, the site of a defunct sugar mill.

Industry

A survey of enterprises in Mozambique, the Census do Empresas (CEMPRE),has revealed the regional dispersal of business and formal-sector employmentin the country and, unsurprisingly, their concentration in the south of thecountry, specifically in Maputo City and Maputo Province. Maputo City andMaputo province—the latter includes a large portion of the Maputo urban area,including the large industrial suburb of Matola—account for 29% of allbusinesses in the country and 51% of employment. The next largestconcentration is in Sofala province, which hosts 7.8% of total enterpriseemployment, owing to the presence of the port of Beira, the rail line toZimbabwe, and the country’s two largest sugar mills, which employ 11,213people. In total, there are over 521,000 people in enterprise employment,including parastatal enterprises, which are still prominent in the country. Sortedby type of business, construction and vehicle repair was the largest, employing116,000 people, followed by processing industries, which employed 50,000people. The survey, commissioned for the Instituto Nacional de Estatìstica (INE),is intended to provide greater information about the nature of enterpriseemployment in the country, although there are some questions about accuracyas it covered registered companies only, and not all registered companiesreturned information for the survey. In addition, the informal sector was notincluded in the exercise. However, in data-scarce Mozambique, it has provideda useful first indication of the nature and extent of commercial employmentand is expected to be supplemented by a labour-force survey, to be undertakenbetween August 2004 and August 2005.

Industry is concentrated inMaputo

24 Mozambique


Number of enterprises and employees, by provinceEnterprises Employees

Total % Total %Niassa 1,417 2.9 17,352 3.3

Cabo Delgado 2,398 5 15,618 3Nampula 5,278 11 39,178 7.5Zambezia 3,614 7.5 36,427 7

Tete 2,834 5.9 21,094 4Manica 3,095 6.4 22,491 4.3

Sofala 6,857 14.2 40,498 7.8Inhambane 3,603 7.5 26,591 5.1

Gaza 5,058 10.5 36,383 7Maputo Province 3,775 7.8 43,127 8.3Maputo City 10,186 21.2 222,448 42.7

Total 48,115 100 521,207 100

Source: Instituto Nacional de Estadistica.

Communications and infrastructure

On June 1st, the incumbent mobile operator in Mozambique,Telecommunicaçoes Moveis de Moçambique (TMM), also known as MCel,signed a three-year, R70m (US$10m) contract with Ericsson of Sweden tofacilitate the expansion of its GSM network. Launched in November 1997, MCelis 100% owned by the government. Ericsson is to supply microwavetransmission equipment as well as support services. The investmentdemonstrates the confidence MCel has in the potential of the mobile market inMozambique, despite having lost its monopoly status in December 2003 whenVodacom Mozambique entered the market (January 2004, Communicationsand infrastructure). Vodacom Mozambique, which is majority owned byVodacom South Africa, announced at the end of June that it had signed100,000 mobile subscribers and had a 11% market share.

In April parliament passed a government bill to liberalise thetelecommunications sector. A law of 1999 opened the market to private mobileoperators, and on this basis Vodacom South Africa set up a subsidiary in 2003.The new bill aims to introduce competition into the fixed telephone network,thereby ending the monopoly of Telecomunicações de Moçambique (TDM).The government wants to find a strategic partner to take a majority stake inTDM, in order to attract funds for the expansion of the network. Thejustification for the government's decision to privatise TDM is that majorinvestments need to be made, and the state cannot provide all the funding.The bill establishes the principle of non-discriminatory interconnection chargesbased on the real costs of interconnection as approved by the regulator.Operators must also comply with the principle of universal service, ensuringthat phone services are available in remote areas. Mozambique has 0.46phones per 100 inhabitants, the lowest of all the members of the SouthernAfrican Development Community (SADC) members, barring Malawi. The aimof the bill is to increase the density to two phones per 100 inhabitants.

Mobile incumbent gears itselffor expansion

Telecommunications billpasses first reading

Mozambique 25


Traffic through Mozambique’s five largest ports rose by a moderate 4% in 2003.Traffic at Maputo, the largest port in terms of traffic, grew strongly, rising by 12%;much of this was based on higher transit traffic to and from South Africa,which rose by 25% to 1,456,200 tonnes, while Zimbabwean traffic fell by 19% to223,000 tonnes, and that of Swaziland fell by 3% to 178,000 tonnes. Maputoport—which has been under private management since April 2003, when theMaputo Port Development Company took over—is targeting regional customers,primarily in the industrial heartland of north-east South Africa aroundJohannesburg as its primary growth market (April 2003, The domesticeconomy: Communications and infrastructure).

The port of Beira has continued its steady decline in recent years, largelybecause of the economic collapse in Zimbabwe, which was formerly its largestcustomer. Other regional traffic has increased, however; trade with Zambiatotalled 21,500 tonnes in 2003, up from an insignificant 1,400 tonnes the yearbefore. Nacala, the third-largest port, registered moderate growth of 6%,although transit traffic to Malawi was down by 28%, to 129,000 tonnes. Littlehas been achieved to increase the relevance of the Nacala corridor to Malawi asa trade route. Although a concession has been granted to a private consortiumto manage and develop Nacala, the group has yet to make solid progress. At thesame time, Malawi’s traffic through Beira rose by 56% in 2003, to 313,000tonnes. Mozambique’s secondary ports, which are primarily involved in coastalshipping to and from Maputo, Beira and Nacala ports, posted differing results;trade at Quelimane rose by 42% while trade at Pemba declined by 15%.

Port traffic('000 tonnes)

2002 2003a % changeMaputo 3,250 3,643 12.1Beira 1,982 1,752 -11.6

Nacala 550 584 6.3Quelimane 101 144 42.4

Pembab 51 43 -15.0Total 5,933 6,166 3.9

a Per person. b Includes the port of Mocímboa da Praia.

Source: Companhia de Portos e Caminhos de Fero de Moçambique.

On May 5th Mozambique’s state ports and railway company, Companhia dePortos e Caminhos de Ferro de Moçambique (CFM), concluded an internationaltender for the rehabilitation and reconstruction of the Beira railway corridor, inwhich an Indian consortium, Rites and Ircon, was declared the winner. Theconsortium has rights to manage the port and rail system for a 25-year periodunder a build-operate-transfer (BOT) principle, after which control will revert tothe state. Management control is scheduled to be transferred on September 1st.CFM will hold a 49% stake in a new joint-venture company, which is to beincorporated with Rites and Ircon, and which will manage the facilities. TheBeira corridor includes the rail line from the port of Beira to Machipanda at theZimbabwean border, as well as the Sena rail line from Beira to the Moatize coalmines in Tete province. The latter is already being partially rehabiliated by CFM

The port sector is picking up

The Beira rail corridor tenderis finalised

26 Mozambique


and the new concession agreement pledges to complete this work. In additionto the restoration of the railway infrastructure, the agreement includes theacquisition of new engines and other rolling stock. The most obvious candidatefor traffic on the Sena line would be the Moatize coal fields (see Mining),should investment for them be secured, and the sugar mill at Marromeu,although this would require the construction of a branch line. It is expected thatreconstruction will take three years to complete. The World Bank has pledgedto grant Mozambique US$120m out of the US$170m needed for therehabilitation; this loan should be approved in October 2004. Rites and Ircon islooking to co-operate with a Brazilian firm, Companhia Vale do Rio Doce(CVDR), which is interested in the Moatize coal mines.

As part of the process of restructuring CFM, which is Mozambique’s largestprivate-sector employer, and preparing for its new post-privatisation role, CFMis continuing the process of rationalising its labour force. A total of 10,411 of itsemployees are to be made redundant, of which 3,882 have already been

Quelimane port under privatemanagement

CFM resutructuring anddownsizing are under way

Mozambique 27


retrenched. The bulk of all retrenchments, nearly half, are to take place in CFM-central (Beira), partly because of the collapse of business there. The World Bankis providing assistance to fund redundancy payments and reintegrationassistance, which includes backing the setting up of new enterprises by formeremployees. When the concessioning process is complete, CFM will essentiallybe a holding company, managing contracts for its assets, which will be privatelymanaged, while benefiting from its joint-venture participation in these newcompanies together with foriegn investors.

Financial and other services

On June 3rd Banco de Moçambique (BDM, the central bank), issued 2.5mTreasury bills, each with a value of MT100,000 (US$4.2) and a five-yearmaturity. Interest on the first payment, which is due in December, has beenfixed at 15%, and subsequent rates will be variable, based on an index thattakes into consideration recent transactions by the BDM in its issue of othershort-term paper. Investors have also been promised that future yields will beabove any commercial-bank deposit rate; this is the case for the 15% interest duein December. There was heavy demand for these bills, which were five timesover-subscribed. This latest issue is part of an ongoing effort by the BDM toretire expensive government paper, which was used to finance a bail-out oftwo former state banks. Given heavy demand for the sale, BDM officials nowbelieve that they could have successfully issued much lower interest bearingpaper. In other developments, a bill on financial institutions was passed inApril, one of the objectives of which is to tighten banking-sector supervisionand facilitate the entry of institutions to the micro-finance sector, which hasbeen targeted as an important element in the government’s poverty reductionand rural development strategies.

Energy

A Norwegian oil company, Det Norske Olse-Selskap (DNO), started exploratorydrilling on July 1st for natural gas in the Inhaminga Block, near Buzi, south ofBeira in Sofala province. DNO, like most foreign energy companies in the area,is attempting to demonstrate the existence of gas deposits in commerciallyexploitable quantities. If found, gas could be exported to South Africa throughthe newly completed pipeline built by a South African company, SASOL; thepipeline is supposed to be an open-access, government-regulated serviceprovider, although there is still some apprehension among foreign energycompanies regarding SASOL’s control of both the pipeline and the SouthAfrican gas market, where it has an effective monopoly. Currently, all gas fromthe producing Pande and Temane fields to the south, near the town ofVilanculos, are dedicated to long-term export contracts with SASOL, apart froma portion which has been allocated to Mozambique’s national energy company,Empresa Nacional de Hidrocarbonetos (ENH), to sell, or use, on the domesticmarket, via a branch pipeline to Maputo. The domestic market couldpotentially include large industrial clients, and the authorities are also working

A Treasury-bill issue is sold out

New exploration gets underway at the Buzi gasfield

28 Mozambique


on a scheme to promote the residential use of gas in Maputo and the south ofthe country.

On June 10th a member of the government laid the first stone in the buildingof a pipeline in Ressano Garcia, which is to supply natural gas to the city ofMatola. The pipeline is a branch of the main pipeline that links the gasfields inthe southern Inhambane province to the South African city, Secunda. It isexpected that once the pipeline is completed, it could reduce Mozambique'sfuel imports by around US$80m per year. A local company, Matola GasCompany, has been awarded a contract for the construction of the 100-kmpipeline, which should be completed by June 2005.

After a month of high-level negotiations in Lisbon and Maputo, Mozambiqueand Portugal have failed to reach an agreement over the transfer of the 82%majority share that Portugal holds in Hidroeléctrica de Cahora Bassa (HCB),which runs the largest dam in Mozambique. Exports of electricity from HCB toSouth Africa have been the subject of a lengthy dispute in recent years, withPortugal seeking to raise the price for exports to help it pay down the US$1.7bndebt it accumulated while the dam was idle during the civil war (January 2003,The domestic economy: Energy). The possibility of a transfer first emerged inFebruary 2004 (April 2004, The domestic economy: Energy), when HCBnegotiated an agreement to bring the rates paid by its main customer, SouthAfrica's Eskom, into line with world electricity prices. Negotiations can beexpected to continue in the months ahead.

Mining

The International Finance Corporation (IFC), the private investment arm of theWorld Bank, is to act as adviser on an exploration contract for the Moatize coalmines in Tete province. A request for qualification for the exploration contracthas been issued by the IFC to a number of international mining companies.Mozambique has attempted to attract an investor for a number of years, but amajor stumbling block has been the need to reconstruct the Sena rail line to theport of Beira. However, rehabilitation of the railway line has now beentendered to an Indian consortium, Rites and Ircon, and no longer represents aninsurmountable obstacle (see Communications and infrastructure). Thechairman of the Brazilian mining company, Companhia do Vale do Rio Doce(CVRD), Roger Agnelli, met the Mozambican president, Joaquim Chissano, inApril to discuss CVRD's interest in the coal mines. After the meeting, Mr Agnellitold the local press that initial viability studies were promising, but that furtherstudies were needed to assess the total funds needed for the investment.

After reaching an agreement in principle with several financial institutions inMarch 2002, Kenmare Resources of Ireland, finally announced US$269m ofdebt financing for the Moma titanium mining project in June 2004—one of thelargest debt financings for an independent mining company (April 2002, Thedomestic economy: Mining). The Irish company must raise US$55m of equitybefore it can draw down the debt. Lenders include the African Development

A Brazilian company may beinterested in Moatize coal

Titanium mining projectmoves ahead

A gas pipeline to Matola isbeing built

Stalemate prevails over HCB

Mozambique 29


Bank, the European Investment Bank and a South African bank, ABSA. Theproject comprises a large deposit of titanium minerals located on the coast ofNampula province. Development of the resource involves the construction ofan on-site processing plant and an off-shore loading terminal. The mine isexpected to begin production in the second half of 2006, with annual outputforecast at 600,000 tonnes of ilmenite and rutile. At full production, it isexpected to produce 5% of world supply.

Foreign trade and payments

Data from the Banco de Mocambique (BDM, the central bank) on the currentaccount for the first quarter of 2004 confirm the importance of large projects inMozambique's merchandise exports; they accounted for 85% of total exports,compared to 16% of total imports. This confirms the ever-increasing importanceof the large projects to the economy. The trade deficit narrowed slightly toUS$91.8m, compared to US$92.9m in the first quarter of 2003, although thisfigure masks large increases in both exports and imports, of 61% and 40%respectively. The services deficit narrowed to US$71m from US$75.5m, partlybecause of lower debits in communications, construction and insurance. Thecurrent transfers balance declined between the first quarters of 2003 and 2004,to US$57.5m from US$85.4m. The current-account deficit widened to US$115.9mfrom US$107.1m.

Current account(US$ m)

2003 20041 Qtr 1 Qtr

Trade balance -92.9 -91.8 Exports (fob) 182.2 294.1 Large projects 121.3 251.3 Imports (fob) -275.1 -385.9 Large projects 69.0 57.7

Services (net) -75.5 -71.0 Transport -17.3 -35.8 Travel -10.4 -22.1 Communications -8.1 -0.4 Construction -11.7 -0.3 Insurance -9.7 -0.1 Other services -18.3 12.3Goods & services balance -168.4 -162.8Income balance -24.2 -10.6Current transfers balance 85.4 57.5Current-account balance -107.1 -115.9


Mozambique’s external debt stock increased to US$4.6bn in 2002 fromUS$4.4bn in 2001, according to the World Bank’s recently published GlobalDevelopment Finance, 2004. Long-term debt climbed by 7.5% to US$4bn, whileshort-term debt dropped by 25.3% to US$371m, even though principal arrears onlong-term debt increased by 8.4% to US$244m. Despite the rise inMozambique's external obligations in 2002, World Bank figures show an

Mozambique's external debtincreased in 2002

Current account was in deficitin first quarter of 2004

30 Mozambique


improvement in key debt ratios. Total external debt as a proportion of GNIdeclined to 135.2% from 142.1% and the ratio of debt service to exports of goodsand services fell to 6.0% from 8.3%. Concessional debt as a percentage of totaldebt increased to 51.6%. Mozambique's external debt is estimated to havecontinued to edge up in 2003, reflecting a build-up of arrears and inflows ofnew borrowings.

External debt(US$ m unless otherwise indicated; year-end)

2000 2001 2002External debt 7,038 4,449 4,609 Long-term debta 6,254 3,757 4,039 Short-term debt 564 497 371 Interest arrears on long-term debt 399 225 244 Use of IMF credit 219 196 200Debt service (paid) 88 89 76 Principal (long-term debt) 57 71 53 Interest (long-term debt) 19 8 14Ratios (%)Total external debt/gross national income 203.8 142.1 135.2Debt-service ratiob 11.4 8.3 6.0Total external debt/exports 915.5 414.8 362.8Multilateral/total external debt 15.8 26.4 32.4Concessional debt/total external debt 49.5 46.4 51.6

a Long-term debt is defined as having original maturity of more than one year. b Debt service as apercentage of earnings from goods and services.

Source: World Bank, Global Development Finance, 2004.

The Ministry of Education has agreed to repay a sum of about US$250,000 tothe Swedish government under an agreement reached between the two sidesin April. An audit ordered by the Swedish International Development Agency(SIDA), and carried out by Ernst and Young, confirmed that funds provided tothe Ministry were used for the granting of unauthorised scholarships, many ofthem to the family of the minister of education, Alcido Nguenha. The audit,which also covered a grant of US$8m in project aid for the health sector,uncovered other improprieties, including international travel of marginalbenefit to the Ministry. Other donors who co-financed the health projects at theMinistry may also order audits. Despite concerns about propriety at theMinistry, donors are still pledging further assistance for the sector. AlthoughMr Nguenha has promised to repay funds to Sweden, donors have promised atotal of US$98m to the Ministry of Education for a number of projects, underan agreement announced on April 16th. There are no signs that Mr Nguenha isunder serious pressure from his government over the incident.

On May 6th the US president, George Bush, announced that 16 developingcountries had become eligible for funding from the Millennium ChallengeAccount (MCA), listing Mozambique as one of the nations selected. Theinitiative supports developing countries that embrace political and economicreform, and directly ties aid, in the form of grants, to good governance,democracy and free-market policies. Development assistance totalling US$1bnwill be made available this year for all selected nations, in effect doubling US

Mozambique agrees toreimburse Sweden

Mozambique qualifies forMillennium Challenge funds

Mozambique 31


development aid. Eligible countries are required to submit project proposals tothe MCA’s Administrative Council stating their specific goals, methods formeasuring results, and accountability procedures. In response, the Ministry ofFinance has set up a high-level group headed by the prime minister, LuisaDiogo, who is also finance minister, to deal with the application. In June adelegation from the US Millennium Challenge Corporation visited Maputo toassess whether the country can gain access to funds. Disbursements are by nomeans automatic and could take months to materialise, depending on thequality of the submission.

Donors have made a series of pledges for new funds to Mozambique. Theseinclude funds for roads, health care, and HIV/AIDS.

• The Arab Bank for Development in Africa (BADEA) is to contributeUS$10.9m to rehabilitate roads in Maputo City and for the tarring of the roadlinking Chissano to Chibuto in the southern Gaza province. The rehabilitation ofthe Maputo roads is budgeted at US$20m, with US$10 coming from BADEA andthe remainder from the Kuwait Fund. The rest of the BADEA funds will be usedfor the Chissano-Chibuto road.

• The French development agency, Agence Française de Développement(AFD), has pledged €14.5m (US$17.4m) to support healthcare programmes inCabo Delgado province. The funds have been earmarked for the construction ofsix health centres, the rehabilitation of a hospital in the provincial capital,Pemba, and the recruitment and training of health staff.

• The US government pledged on April 28th to disburse an additionalUS$11m to add to the US$16m financial package granted for the implementationof the US President's Emergency Plan for AIDS Relief. The funds are aimed atprogrammes that will assist orphans and reduce mother-to-child transmission atbirth and at prevention campaigns. The funds will be administered by UNAIDS,which is a partner in the US President's Emergency Plan for AIDS relief.

Funds are pledged for roads,healthcare and HIV/AIDS

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