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Foreign investment buoys Mozambique growth through extractives, says World Bank


Extractive industries in Mozambique kept up double-digit output growth last year thanks to “sizeable foreign direct investment (FDI) inflows and recovering commodity prices”, according to a new report.

Support for the oil, gas and mining industries “is a welcome trend, given the importance of this sector for crowding in investment and creating jobs”, the World Bank’s biannual 'Mozambique Economic Update' report said (40-page / 3.98 MB PDF).

The report, released towards the end of July 2017, said the trend continued in early 2017 with a 41% expansion in output, “making investment in extractives the driver of the economic pick-up in first quarter gross domestic product growth”.

However, the report said the trend is indicative of the extent of concentration in the economy, especially in exports. “It also calls for renewing the focus on diversifying exports through a more dynamic private sector.”

“A recent analysis of developing and emerging economies from 2003 to 2014 found that FDI booms related to natural resources led to a bonanza of other diversified FDI projects in manufacturing, services, construction and other sectors,” the report said.

According to the report, Mozambique’s FDI inflows “have boomed since 2010 and in 2012 Mozambique received 15% of all sub-Saharan African (SSA) FDI (while it accounts for a little less than one per cent of SSA’s GDP)”. In 2013-2015, the World Bank said FDI amounted to 70% of Mozambique’s GDP – “the highest share of all African countries”.

But reform is needed in the medium term to overcome “structural factors that constrain the competitiveness of the private sector and the sector’s resilience to shocks is a priority”, the report said. “As extractive industries play an increasingly important role, Mozambique’s economy will continue to be exposed to the commodity cycle and external shocks. There are also risks that the non-extractives sector gets stifled by the heavy economic weight of the extractives sector.”

Issues hampering development of the private sector include the absence of a comprehensive credit reporting system, which “compromises banks’ ability to distinguish good from poor performers and makes them reluctant to lend in the absence of collateral”, the report said. “Similarly, equity finance is constrained by a corporate governance regime that provides few incentives for firms to make financial information and audited reports of their activities available. As a result, investors are hesitant to invest because they cannot assess the viability of firms seeking finance.”

In addition, the report said it takes 950 days “to enforce a simple contract in Mozambique, 50% longer than in other SSA countries, and the costs associated with going to court are nearly three times as high as in the rest of the continent”. “When it takes that long to get justice, many contracts and economic activities never take place.”

As Mozambique starts to rebound from crisis, “it will also be important that new firms find it easy to enter the market and get a fair chance to compete”, the report said. However, the report said the country still ranks 137 out of 190 economies in terms of business registration procedures and competition policies. “Competition policy in Mozambique is still taking its first steps. While the legal framework has been in place since 2013 and a competition authority was constituted in 2014, it has yet to take up operations.”

According to the African Development Bank’s ‘Transition Towards Green Growth in Mozambique’ report (76-page / 3.55 MB PDF), since the discovery in 2009 of the “world class reserves of first coal and later natural gas, Mozambique’s attractiveness to foreign investors prompted several billion dollars of FDI from the world’s largest mining and oil companies from South Africa, Australia, Brazil, the US, Italy and, more recently, China”.

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