The FINANCIAL — Mozambique is increasingly “A two-speed economy” as extractives and mega projects drive recent growth whilst other sectors lag behind, according to the third edition of the World Bank Mozambique Economic Update, released on July 31.
Trends in early 2017 show signs of improvement in the Mozambican economy as first quarter growth picked up and the currency stabilized. Much of this improvement is attributed to the country’s recovering coal industry and a great deal of the growth outlook depends on developments in the extractives sector. According to the report, strengthening prices for extractives, along with a post el Niño recovery in agriculture and progress in the peace talks, could steer growth to 4.6 percent in 2017, and towards 7 percent by the end of the decade.
But economic conditions remain challenging. Growth is well below the levels seen in recent years and inflation remains very high at 18 percent. Monetary policy has supported a significant adjustment in the economy. However, Mozambique’s reference lending rate is now amongst the highest in sub-Saharan Africa, and average commercial bank lending rates in the region of 30 percent are prohibitively high for much of the private sector. Hence, more needs to be done to help Mozambique’s economy recover, especially the small and medium enterprises.
In a special focus section, this edition of the Mozambique Economic Update explores the profile of the formal private sector and the impact of the ongoing economic downturn on its performance. It notes growth and increased dynamism as the number of firms in the formal sector doubled since 2002 and as the share of small and medium enterprises has grown, a phenomenon that bodes well for productivity growth. These are positive signs. However, the ongoing economic downturn is likely to have a disproportionately negative impact on the emerging micro, small and medium enterprises.
“While extractives and large industries are showing some resilience, the rest of the private sector, the green shoots of the economy, is facing reduced growth in demand, higher costs, and difficulties in access to credit,” said Carolin Geginat, World Bank Program Leader for Equitable Growth, Finance and Institutions.
Reestablishing macroeconomic stability through a more balanced mix of fiscal and monetary policy is a priority. Slowly easing inflation and lower credit levels suggest that the monetary policy cycle could begin to loosen as the economy continues to adjust. However, making this transition smoothly will require a sharper fiscal policy response to restore the health of Mozambique’s public finances. Consolidation reforms to control the wage bill would help to ease pressures on the budget, and much rests on the outcome of the debt negotiations initiated by the Government of Mozambique. Equally as important for restoring sustainability would be a commitment from the authorities to pursue policies that help Mozambique build fiscal buffers and to increase the resilience of the private sector in the long-term.