COUNTRY STRATEGY PAPER

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COUNTRY STRATEGY PAPER

Mozambique

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Exchange vzw. – jaarrapportering 2018 – Country Strategy Paper Mozambique 1

The information provided in this volume is designed to provide an introduction to the opportunities and challenges

of ‘private entrepreneurship on SME level’ in the country specified. Exchange vzw. has compiled the information and

the references from various public and formal sources, as well as from its own activity, research and experience in the

country. The ambition is to give insights, not to provide a complete economic or legal guide to the private sector. The

information is continuously updated and

completed. Exchange vzw. can not be held responsible for errors, omissions or lack of accuracy and disclaims any liability in connection with the use of this information.

Feedback is welcome at info@exchangevzw.be

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Table of Contents – Country Strategy Paper – Mozambique

Socio-‐political situation ... 7

Economic situation ... 7

Macroeconomy ... 9

Key sectors and challenges ... 11

AGRICULTURE AND LIVESTOCK ... 11

AGRICULTURE ... 11

POULTRY ... 13

FORESTRY ... 13

CONSTRUCTION ... 15

EXTRACTIVE INDUSTRIES ... 16

NATURAL GAS ... 16

MINING ... 17

TOURISM ... 17

Imports and exports ... 18

Trade Agreements ... 20

Africa ... 20

USA ... 20

EU ... 20

Other Bilateral Trade Agreements ... 20

Trade Relations with Flanders/Belgium ... 21

Government and Organizations’ strategy ... 22

The Beira Corridor ... 24

Private Entrepreneurship ... 26

Ease of doing business ... 27

Business climate for SMEs ... 28

Exchange vzw in Mozambique ... 29

Mozambique – representations, economic missions and contacts in Belgium – overview and hints ... 30

Belgium ... 30

Flanders ... 34

Brussels ... 36

Wallonia ... 37

Belgium in Africa ... 39

Europe ... 40

Interesting websites for information regarding Mozambique ... 42

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Introduction

This document is a practical guide for Mozambique and a strategy for Exchanges work in this country.

Information in this document is partially based (part I and II) on existing information (country papers FIT, JCA and JSF from the Belgian development organisations etc.), that are joint as annexes to this document. Based on this existing information both country and project coordinators determinate the country strategy with input from the local representatives (part III)

The annual review of this document (especially part III) will help Exchange to monitor and reorientate its work each year if needed.

The final goal of this document is not only to offer applicants a better service with long term impact, but also to create more visibility for Exchange in the country and a larger network with implicated actors both North and South.

At the beginning of each work year the Growth Programme coordinator and country coordinator will update this document with the most recent figures and will adjust the strategy of Exchange in the country if necessary.

List of abreviations: FIT (Flanders Investment & Trade), JSF (Joint Strategic Framework), JCA (Joint Context Analysis), NGA (Non Governemental Actor)

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Figure 1: Mozambique map. From Worldmapsonline.com

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Overview and general facts

Mozambique, officially called the Republic of Mozambique, is bordered by Malawi and Zambia to the northwest, Tanzania to the north, the Indian Ocean to the east (with the coastline facing

Madagascar), Swaziland (Eswatini) and South Africa to the southwest, Zimbabwe to the west. Its location represents a strategical advantage, as four of the bordering countries are landlocked and rely on Mozambique to reach global Markets About 70% of the population ( 28 million in 2016) resides in rural areas. Mozambique is rich in water, energy, fertile land, mineral resources as well as newly discovered natural gas offshore. It has three deep seaports, and a relatively vast pool of labour. The strong ties to the South Africa, the main economic engine of the region, impair its economic and socio-‐political development.

When Mozambique reached independence in 1975, it was one of the poorest countries in the world. In the subsequent years, the country was further impoverished by civil war from 1977 to 1982, inefficient socialist policies and economic mismanagement.

Through a series of macroeconomic reforms, international economic support, and political stability after the 1994 elections, the country’s GDP (in purchasing power parity) jumped from $4 billion in 1993 to $37 billion in 2017. Recent fiscal reforms have improved revenue collection. Despite these significant improvements, about one over every two people is below the poverty line and the majority of the work force is still relying on subsistence agriculture.

Between 1990 and 2017, Mozambique’s life expectancy at birth increased by 16.0 years, mean years of schooling increased by 2.7 years and expected years of schooling increased by 6.0 years. GNI per capita increased by about 198.6 percent.

(Sources: WorldBank, CIA Factbook, Human Development Report 2017-‐UNDP)

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Population: 26,573,706 Languages: Emakhuwa 25.3%, Portuguese (official) 10.7%,

Xichangana 10.3%, Cisena 7.5%,

Elomwe 7%, Echuwabo 5.1%, other

Mozambican languages 30.1%,

other 0.3%, unspecified 3.7% (2007

est.)

Ethnicity/race: African 99.66%

(Makhuwa, Tsonga, Lomwe, Sena,

and others), Europeans 0.06%, Euro-‐

Africans 0.2%, Indians 0.08%

Religions: Roman Catholic 28.4%,

Muslim 17.9%, Zionist

Christian 15.5%, Protestant 12.2%

(includes Pentecostal 10.9% and

Anglican 1.3%), other 6.7%, none 18.7%, unspecified 0.7% (2007 est.)

Major urban areas -‐ population: MAPUTO (capital) 1.187m; Matola 937,000 (2015) Median age: total: 17.2 years; male: 16.6 years; female: 17.8 years (2017 est.) Population growth rate: 2.46% (2017 est.)

Net migration rate: -‐1.9 migrant(s)/1,000 population (2017 est.)

Life expectancy at birth: total: 53.7 years; male: 52.9 y; female: 54.5 y (2017 est.) Literacy rate: total population: 58.8%; male: 73.3%; female: 45.4% (2015 est.) HIV/AIDS -‐ adult prevalence rate:12.3% (2016 est.)

Unemployment rate: 22.4% (2014 est.); 17% (2007 est.)

Unemployment, youth ages 15-‐24: tot: 39.3%; m 40.2%;f: 38.7% (2012 est.) GDP (official exchange rate): $11.27 billion (2016 est.)

GDP (purchasing power parity): $35.08 billion (2016 est.); $33.35 billion (2015 est.); $30.96 billion (2014 est.)

GDP -‐ real growth rate: 3.8% (2016 est.); 6.6% (2015 est.); 7.4% (2014 est.) GDP -‐ per capita (PPP): $1,200 (2016 est.); $1,200 (2015 est.); $1,200 (2014 est.)

GDP -‐ composition, by end use: household consumption: 71.5%; government consumption: 28.2%;

investment in fixed capital: 20.5%; investment in inventories: 22.1%; exports of goods and services: 34.8%; imports of goods and services: -‐77.2% (2016 est.)

GDP -‐ composition, by sector of origin: agriculture: 24.8%; industry: 21.6%; services: 53.6% (2016 est.)

Gross national saving: 5.6% of GDP (2016 est.); 5% GDP (2015 est.); 17.2% GDP (2014 est.) Agriculture -‐ products: cotton, cashew nuts, sugarcane, tea, cassava (manioc, tapioca), corn, coconuts, sisal, citrus and tropical fruits, potatoes, sunflowers; beef, poultry

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

Industrial production growth rate: 5.4% (2016 est.) exports of goods and services: 34.8%

imports of goods and services: -‐77.2% (2016 est.) Labor force: 12.5 million (2016 est.)

Labor force -‐ by occupation:agriculture: 81%; industry: 6%;services: 13% (1997 est.) Population below poverty line: 46.1% (2015 est.)

Inflation rate (consumer prices): 19.2% (2016 est.); 3.6% (2015 est.) Exports: $3.328 billion (2016 est.) $3.413 billion (2015 est.)

Exports -‐ commodities: aluminum, prawns, cashews, cotton, sugar, citrus, timber; bulk electricity Exports -‐ partners: Netherlands 30.8%, India 15.2%, South Africa 14.6% (2016)

Imports: $4.733 billion (2016 est.); $7.577 billion (2015 est.)

Figure 2:Age pyramind (CIA Factbook)

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Imports -‐ commodities: machinery and equipment, vehicles, fuel, chemicals, metal products, foodstuffs, textiles

Imports -‐ partners: South Africa 36.6%, China 10.9%, Netherlands 7.8%, Bahrain 5.2%, France 4.2%, Portugal 4.2%, UAE 4.1% (2016)

Exchange rate MZM -‐ USD: 63.067 (2016 est.); 63.067 (2015 est.); 39.983 (2014 est.)

(Sources: Flanders investment and trade, World Bank, the Observatory for Economic Complexity, Human Development Report, UNDP report.hdr.undp.org, CIA World Factbook

https://www.cia.gov/library/publications/the-‐world-‐factbook/geos/mz.html).

Socio-‐political situation

After almost five centuries as a colony of Portugal, Mozambique gained its independence in 1975, and plunged into a prolonged civil war until the 1990s. The Front for the Liberation of Mozambique (FRELIMO), created by Eduardo Mondlane became the ruling party, and Samora Machel was elected the first President of Independent Mozambique. The country remained formally Marxist until 1990, when a new constitution introduced multiparty elections and a free market economy. Fighting between FRELIMO and the rebel Mozambique National Resistance forces (RENAMO) was formally ceased through the negotiation of the UN in 1992.

In 2004, after 18 years in charge, president Joaquim Chissano stepped down and was succeeded by Armando Guebuza, who served two terms and then passed the office to Filipe Nyusi in 2014. The political situation cannot be considered completely stable, as the residual armed forces of RENAMO have occasionally engaged in insurgencies since 2012.

The political context is still marked by the scars left by 15 years of civil war, which have left the economy in ruin. Frelimo and Renamo are still the main political forces, followed by Movimento Democrático de Moçambique (MDM). Despite Frelimo victory in 2014 presidential election, which ensures a comfortable majority in the parliament, Renamo and MDM have gained ground.

Occasionally, the preserved Renamo armed militias hidden in the country generates clashes with Mozambican armed forces, reviving the never-‐ending conflict with Frelimo. A cease-‐fire was achieved in December 2016, while Peace treaties between the two parties have been restored in August 2017, when the President Filipe Nyusi met Renamo leader, Alfonso Dhlakama. A Constitutional review was agreed between both parties, allowing for a further redistribution of powers. Working groups created from that event have developed reccomendations on central issues such as decentralization and military power, which are now discussed by the parliament.

However, RENAMO’s president died from illness on May 3rd 2018, casting further uncertainty over the peace process. In addition, the attempts to find a sustainable political settlement are taking place against an uncertain economic outlook. Two years after the disclosure in 2016 of debt contracted without the required legal procedures (the so-‐called Hidden-‐Debts case), the Government is preparing a roadmap to address these liabilities and tackle the unsustainable debt position. Most options for resolution are likely to include a new IMF program, since then cancelled.

With the 2019 Presidential election on the horizon, the challenging fiscal situation could limit the financial and political resources available to complete the process to achieve a conclusive sustainable peace settlement, which might require constitutional reforms.

Economic situation

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Mozambique is one of the poorest countries in the world. Its Human Development Index score increased of 108.9% between 1990 and 2017, passing from 0.209 to 0.437, but the country remains in the low human development category and ranks 180th out of 189 countries. (Human Development Report 2017, UNDP)

The average annual growth rate in Mozambique from 2005 to 2015 was 7%, constituting one of Africa’s strongest performances. However, the combination of internal military confrontations, important decreases in foreign direct investments, drought effects from El Niño, declining prices for traditional export commodities, and elevated external debt and inflation, nearly halved the average growth to 3.8% in 2016. Increased coal exports and agricultural production lead to a slight recovery in 2017 (4.7%) and 2018 (approx. 5.3%). The other sectors underperformed (2018 African Economic Outlook Country Note. Cia Factbook)

The massive Mozambican foreign debt was reduced under the the IMF's Heavily Indebted Poor Countries (HIPC) and Enhanced HIPC initiatives. However, a 2016 scandal revealed that the

Government offered in the previous years over $2 billion loans to state-‐owned defence and security companies without parliamentary approval or national budget inclusion. Consequently, the IMF and international donors stopped direct budget support to the Government of Mozambique. Despite an international audit performed on the country’debt in 2016-‐17, debt restructuring and resumption of donor support have yet to occur.

(Sources: AEON 2018, AfDB Mozambique Country Strategy Paper 2018 -‐2022, WorldBank, CIA Factbook)

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Economy

Macroeconomy

The economy in Mozambique is slowly recovering from a difficult 2016, affected by the hidden debt crisis and with a consistent slowdown in growth and plunges of the country currency. Inflation remains very high at 18%, further reducing households’ purchase power. Small and medium enterprises have fallen back and their capacity to generate jobs has been restricted even further.

The GDP growth in the first quarter of 2017 reached 2.9%, doubling the growth rate of the preceding quarter. The metical has reach stability in the last year gaining almost 30% value against the US dollar.

Despite a positive GDP growth trend, which has been on average 7% in the last ten years, the Mozambican formal job market remains static and is unable to create adequate employment opportunities for the 400.000 young individuals joining the labour force every year. Accordingly, fostering entrepreneurship can help Mozambique to develop its potential. The private sector is strangled by high credit rates (on average 30% for a one-‐year commercial loan) and depressed private consumption. The result is a contracting real economy, except for the primary sector and some services.

SIGNIFICANT FISCAL DEFICIT

Mozambique has incurred significant fiscal deficits in recent years, on average 5.1% of GDP during 2014-‐16. During the years of marked economic growth, the Mozambican Government expanded public expenditure, benefiting from low debt and revenues from the capital gains tax that limited overall deficits. The suspension of donor funding in 2016, after the discovery of illegal financing operations by the Government, further compromised fiscal stain and debt levels. Without access to international markets and donor direct budget support, the fiscal deficit has been financed

exclusively through domestic borrowing with elevate costs.

Without progress in the debt restructuring process to date, the country’s debt position remains unsustainable. The public sector wage bill still represents a significant burden, whilst recent cuts to the investment budget have heavy socio-‐economic repercussionst. Some of Mozambique’s large State-‐Owned Enterprises represent a financial risk that might compromise recovery efforts if not properly managed.

HIGH INFLATION

In the financial crisis following the 2016 disclosure of secret debts worth nearly 10% of GDP, the debt-‐to-‐GDP ratio reached an estimated 125% at the end of 2016, while the metical registered a 40%

devaluation against the U.S. dollar and inflation suffered a 10-‐fold increase to 19.8%. The Central Figure 3: Mozambique inflation and GDP variation. From Flanders Investment and Trade agency.

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Bank implemented a restrictive monetary policy to control annual inflation from 25% in 2016 to 15.3% in 2017. Thanks to the stronger Metical and foreign currency inflows, year-‐on-‐year inflation reached 3.1% in March 2018. Despite of that, Mozambique’s reference lending rate is still amongst the highest in sub-‐Saharan Africa and average commercial bank lending rates in the region of 30%

are prohibitively high for much of the private sector. Tangible signs as improved exchange rate, lower inflation, and lower credit levels suggest that the monetary policy cycle can become less rigid as the economy continues to adjust. The transition, however, will require a coordinated and robust fiscal policy response.

GROWTH DRIVERS

Minerals exports is being the main contributor to growth in the last two years, thanks to

Infrastructure improvements and rising international prices. By end of June 2017, the mining sector registered a 59.4% year-‐on-‐year increase, driven by strong exports of coal, as well as graphite, titanium, rubies, and iron ore. The favourable weather supported agricultural production, the mainstay of the economy, which grew by 2.2%. In the next year, FDI are expected to be the main driver for growth. The development of the first offshore natural gas extraction project and other exploration projects will potentially bring FDI to over 40% of GDP, as in 2013.

MAIN CHALLENGES

The main challenges are restoring stability and reestablishing confidence through economic

governance and increased transparency, including the transparent management of the hidden debts investigation. Moreover, structural reforms are needed in support of the currently struggling private sector.

Another major challenge for the economy is to focus less on capital-‐intensive projects and low-‐

productivity subsistence agriculture in order to promote a more diverse and competitive economy, as well as strengthening the key drivers of inclusion, such as improved quality education and health service delivery, which could improve social conditions and create the basis for economic

development.

2016 SCANDAL AND CONSEQUENCES

In 2016, the IMF and the development partners exposed fragilities in the governance framework of Mozambique. USD 1.4 billion in loans and guarantees previously kept hidden from the public were revealed, disclosing a hidden-‐debts crisis.

Despite the launch of a criminal investigation into the case by Public Prosecutor’s Office and the admission by a parliamentary commission of the existence of criminal acts, two years later any result is yet to come.

These challenges have been addressed by several initiatives. In 2017, the parliament presented a new law on State-‐owned enterprises to strengthen the governance framework, rationalize the financial sector, and assist in the mitigation of fiscal risks. New measure to enhance and

parliamentary oversight have been approved, but their implementation in not ensured. It is the case of the anti-‐money-‐laundering framework which, despite being adequate in its structure, is not effective in its implementation.

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(Sources: African Economic Outlook Country Note 2018, Flanders investment and trade, World

Development Bank -‐ overview, the Observatory for Economic Complexity, Human CIA World Factbook).

Key sectors and challenges

Due to infrastructure improvements and rising international prices, minerals exports was the main contributor to growth in 2017 and 2018. By end of June 2017, the mining sector registered a 59.4%

year-‐on-‐year increase, driven by strong exports of coal, as well as graphite, titanium, rubies, and iron.

Better

weather patterns facilitated a 2.2% growth in agricultural production, the mainstay of the economy.

From a structural perspective, FDI inflows are expected to be a main growth driver. The ongoing initial development stage of the first offshore natural gas extraction project is expected to be

followed by exploration projects in other offshore areas, potentially bringing FDI to over 40% of GDP, in line with 2013 levels. The pre-‐investment decision preparations for the large-‐scale onshore

liquefied natural gas projects continue to progress. The projects’ sheer magnitude, estimated to double GDP within 10 years, will continue to be the main positive for Mozambique.

AGRICULTURE AND LIVESTOCK

AGRICULTURE

The majority of Mozambican workforce works in agriculture, but the sector is responsible for less than 25% of the national GDP. Despite the abundance of arable landmass, the advantageous geographic proximity to flourishing Asian markets and the long coastline, it is still prevalently a subsistence and small-‐activity. Only approximately 12% of cultivable land is used, and smallholder farmers produce almost 90% of the national food supplies. The main products are cotton, cashew nuts, sugarcane, tea, manioc, corn, coconuts, sisal, tobacco, citrus and tropical fruits, potatoes and sunflowers. Agriculture constitutes about 20% of total exports, but the balance of trade is still in deficit, with products such as rice that have to be imported to satisfy the high local request.

Bottlenecks and challenges in the sector

Several bottlenecks prevent farming and agribusiness to develop: lack of skills and knowledge among producers, underdeveloped value chains and market access for farmers, outdated production Table 1: GDP by Sector. From afdb -‐ 2018 African Economic Outlook Country Note

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technology (seed, fertilizer, agro-‐chemicals), lack of infrastructure, limited aggregation and market capacity, limited processing technology, and inadequate support from the government.

The sector requires both private and public investment, and an enabling business environment. New private initiatives exist, but they require the support of public investment.

LAND TENURE INSECURITY

Responsible and stable investment in agriculture is threaten by land tenure insecurity. Mozambique’s land reform process and land administration system is improving the situation, implementation at the local level is still critical. Many foreign investors, especially China, Japan, and the Gulf States, are interested in acquiring large farm land, As subsistence farming constitutes the main (and often only) source of income in Mozambique, land grabbing constitutes an enormous threat for the population.

UNPREDICTABILITY OF CLIMATE

A significant challenge is the unpredictability of floods and draughts, that may disrupt agriculture and livelihoods. The World Bank promotes the development of climate-‐smart agriculture by promoting technologies in the form of drought-‐tolerant and short-‐maturing varieties. Investments in irrigation infrastructure and improvements in the management of public irrigation schemes will also contribute to mitigate drought risk.

RESTRICTED ACCESS TO FINANCE

Access to finance is another major challenge for agriculture development in Mozambique.

Mozambique is ranked 138 among 190 economies in the ease of doing business, according to the 2018 World Bank annual ratings. Agribusiness have an extremely limited access to affordable finance.

Local currency loans are typically only available at rates of over 20 percent, while foreign loans are difficult to obtain because of the relatively underdeveloped nature of the agribusiness export sector.Small and Medium Enterprises (SMEs) are unable to afford the conditions offered by financial intermediaries, usually requiring more than a 100 percent collateral.

LIMITED INFRASTRUCTURE

The limited expansion of infrastructure represent another important constraint. The poor quality of roads, the low coverage of railway service and the unreliability of existing rail services restrict farmers’ access to markets.

The poor quality of electricity supply is adding to the costs faced by entrepreneurs across all sectors.

Unclear labor laws in agriculture constitute an obstacle for the creation of jobs in the sector.

Opportuinities

Despite being chronically unfavourable, Mozambique’s investment climate is markedly improving. As measured by The World Bank Doing Business Indicators, it ranks 137 out of 190 countries in 2017, up 20 from 2014.

GOVERNMENT’S ATTEMPTS TO IMPROVE THE INVESTMENT CLIMATE

Private sector participation in agrobusiness is hindered by the several issues mentioned above. Also thanks to international pressure, the Mozambican government is deploying several initiative to improve investment climate in the agriculture sector. Agriculture represents an important

contributor to rural poverty reduction and has the potential to narrow persistent income disparities between rural and urban areas in the country. It can be effective to improve those regions that did not obtain advantages from the economic gains of recent years.

GREAT POTENTIAL FOR EXPANSION

According to producers, processors and traders/exporters in several value chains, the country has a great potential for expanding and increasing productivity and efficiency.

The gradual increase of private investments and introduction of new commercial models is supporting and low but steady agricultural transformation.

According to the International Monetary Fund, the agribusiness-‐smallholder business models have the potential for up-‐scaling and to join productive commodity value chains, thus generating higher

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incomes for farming households. Thus, creating the bases to compete on the international market.

(IMF, 2014, “Mozambique Rising Building a new tomorrow” Page 73) MAIN CROPS

Agriculture in Mozambique offers great variety but lacks in quality control and certification, which are fundamental to supply products in the international market. Local markets exist for rice, beans, maize, peanuts, and cassava. The production of other crops has increased in recent years, especially soya, sesame, tobacco, cotton, sugar cane, banana, and vegetables. Citrus and cashew also represent two traditional crops with significant growth potential.

FEED PRODUCTION

Given the constant increase of poultry consumption, various market studies show the potential for feed production, including soy, with possible margins above 20-‐25%-‐ The agricultural sector may be boosted by packaging and downstream manufacturing of several crops, such as cashew nuts, tobacco and sugar. The launch of new public private development initiatives such as the Beira Agricultural Growth Corridor (BAGC) can generate positive effects on long term productivity. However, the sector still needs important investments in irrigation, food storage, processing and logistic, as in the value chain farmers experience crop and post-‐harvest losses reaching 30-‐40% of the total.

FRUIT PROCESSING

Fruit processing ensures a better food supply and nutrition for the local market. It can provide the added value needed to reduce dependence on imports and increase competitiveness, as it extends the life of the fruit, standardizes the quality, increases availability reduces losses, and simplify distribution.

The Mozambican fruits that can have a significant market value if processed are Mango, papaya, pineapple, guava, passion fruit, cashew, banana, coconut and citrus.¹

POULTRY

As a result of growing urbanization and income growth, the demand for chicken meat in the country has doubled in the last decade. According to the USAID Feed the Future report, it is expect to triple in the next ten years. However, domestic production has not kept the pace of the increasing demand.

Chicken meat is mainly imported from Brazil, Asia and USA, for a value of approximately USD$23 million. 2.3 million smallholders are involved in the chicken meat sector, producing less than a third of total production.

Value chain

The poultry value chain includes the production of animal feed, mainly made of soybean and maize.

However, overall, the national production of soybeans is not able to meet the needs of the poultry sector. There are only a few large scale commercial farmer cultivating soybean and maize, but their dimension is small according to international standards. According to Mozambican regulations, the imported feed has to come from non-‐genetically-‐modified (GM) producers such as India and Zambia, but controls are not always effective. Several international traders, such as Cargill and Afrigri are important actors as they aggregate the supply, store the production in appropriate facilities and offer capital to several poultry companies across different productive stages.

The poultry sector faces a number of additional constraints: Limited access to seeds, limited quality and availability of domestic animal feed and legumes value chains. The World Bank estimates that less than 10 percent of Mozambican farmers use improved seed varieties, which is limiting yields and also reducing the quality of agricultural produce.

FORESTRY

The forestry sector is one of the sectors with the highest economic potential in Mozambique, especially in rural areas. Forests cover approximately two thirds of the land in the country and one third of it is adequate for commercial timber production. Several factors enhance Mozambique's

1 For detailed information on sesame and cashew production: https://letswork.org/wp-‐

content/uploads/2016/11/background-‐report-‐review-‐of-‐current-‐key-‐sectors.pdf page 24

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forestry sector competitiveness in the global market: the large amount of land, the available ports (Beira, Nacala and Maputo), the proximity to Asia and South Africa as well as the relatively low price for land. It accounts for only 1 percent of the GDP and 10 percent of the industrial production, but the Government of Mozambique receives about USD$6 million in royalties from logging every year-‐

LOCAL ECONOMY RELIES ON FORESTS

Households in rural Mozambique have a strong dependence on forests and woodlands for subsistence needs (food, shelter, energy) and cash income. Fuel-‐wood and charcoal are critical to national and household energy needs. According to the IGC, about 23.7 million m3 of fuel wood are consumed annually.

PLANTATION VS. NATIVE FORESTS

Wood in Mozambique can hail from either plantation forestry or native forest management.

Plantation forestry is generated by tree plantation in licensed areas and usually companies in this sector are large foreign owned enterprises. Native forest management refers to the use of existing forest. In this case, harvesting is done under a license for a defined amount per year, mainly by local small logging companies.

MAIN COMPANIES HAVE LONG TERM CONCESSIONS, SMEs HOLD SMALL LICENSES

Usually, the main companies exploiting long-‐term concessions work on a vertically integrated system, covering all steps from logging to marketing. In contrast, small and medium enterprises (SMEs) hold small licenses. Their products is sold to sawmills and then goes directly to customers. Among the wood processing firms in Mozambique, a number of large companies are specialized in furniture manufacturing and export their end product. The production for the domestic market comes mainly from local carpenters working with basic carpentry. Formally, forestry accounts for about 10,200 direct jobs. However, informally the sector seems to provide more than 200,000 jobs.

Considering both formal and informal companies, 99 % of the native forest enterprises are SMEs and account for 80 percent of employment in the sector. Additionally, 6850 formal and 184000 informal SMEs are trading non-‐timber products, including honey, charcoal, firewood, and handicraft.² Challenges in the sector

The forest industry in Mozambique faces a number of challenges and constrains. Forest are

threatened by deforestation, as the Government of Mozambique estimates an annual deforestation of around 0.5% per year. The main causes of this phenomenon are forest conversion into agriculture and unsustainable production of biomass energy, while illegal logging often anticipates forest conversion to other land uses. The Environmental Investigation Agency (EIA) estimated that over 90 per cent of logging in Mozambique during 2013 was illegal, driven by booming timber exports to China, with a cost for Mozambique of US$146 million in lost exploration and export tax revenues since 2007.

OVEREXPLOITATION

The illegal overexploitation of the few species with commercial value could lead to degradation of Mozambique’s forests. There is limited enforcement of the forest management legislation, often logging concessions are not managed properly, and simple licenses awarded by local governments are also widely abused. One of the main issues, however, consist in the misuse of simple licenses for additional illegal logging: Asian companies buy timber from small-‐scale farmers with simple license sell for a much lower price than the market price, forcing companies with concessions to close their business. The main practice of illegal logging, however, seems to be the cutting of small diameters in the forestry concession and the uncontrolled exploitation outside of the simple licence area. China is the recipient of 80 percent of the unprocessed timber, and the discrepancy between the registered log in Mozambique directed to China and the amount of log registered in China as import is around 30-‐40% of the total.

2 For specific information on the main companies involved, https://letswork.org/wp-‐

content/uploads/2016/11/background-‐report-‐review-‐of-‐current-‐key-‐sectors.pdf

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LACK OF SKILLS AND UNCLEAR FRAMEWORK

The main challenges that SMEs have to face in the forestry sector are the low level of skills and knowledge about safety procedures, restricted harvesting rights, complicated registration and tax processes, missing possibilities for credit, and lack of transparency within logging licenses. The existing laws are often not implemented because of high levels of corruption, as well as due to lack of knowledge and human capital. The licensing process is very complicated and bureaucratic (many institutions involved) and the poor implementation of the regulations as well as the lack of political will hinder the implementation of the law.

PRIVATE INVESTMENT

Private investment has increased in the recent years, and can boost the growth of technical

knowledge and skills, and promoting market access. Promising markets are the provision of charcoal to urban centres from sustainably managed woodlots, the production of furniture and other wood design goods, and the supply of poles and other construction material.

The Finnish bilateral cooperation financed a modern wood products laboratory at the University of Eduardo Mondlane, which could acquire an important role in finding new uses for lesser known species and promoting the use sustainably produced timber, if provided with adequate business management guidance.

CONSTRUCTION

CONSTRUCTION INDUSTRY CAN LEVERAGE MOZAMBIQUE’S GROWTH

The construction industry can be an important leverage of Mozambique’s economic growth. The demand for construction in Mozambique is significantly increasing, propelled by the growth of extractive industries, the need of large infrastructure (railways and roads, ports, etc.) and housing for the expanding communities in those areas, and the growing middle class in urban areas.

PUBLIC INFRASTRUCTURE INVESTMENTS AFTER THE CIVIL WAR

Since the end of the civil war in 1992, Mozambique has invested billions of dollars repairing roads and railways, enlarging harbors, and building new ground transport routes. The emerging

urbanization and the growing middle class are pushing the growth of commercial and housing construction. Moreover, the country has a growing demand for heavy construction works in airports, ports, dams, electricity, railways, roads, and industrial production plants, including the gas industry.

SMEs WORK LOCALLY, WHILE INTERNATIONAL FIRMS ARE INVOLVED IN PUBLIC WORKS

The local construction sector is dominated by SMES, while civil constructions and public works are mainly conducted by large international companies. The local SMEs cannot compete with

international large firms because of their lack of experience and skills.

CONSTRUCTION COMPANES ARE MAINLY IN THE SOUTH.

The construction companies are mainly concentrated in the south of the country, especially in Maputo province. Therefore, the growing demand in the north (Tete, Nacala, Pemba) is not

efficiently satisfied. The companies within the construction sector are numerous and diverse, and the majority of them works in the informal market. ³

Value Chains

The sub segments of construction sector in Mozambique include: civil and public construction, housing construction, the value chains of building material (raw material, building components, finishing’s, etc.), and related services ( access to finance, insurance, maintenance, repair, etc.).

Housing construction

Housing construction is crucial for economic development and SMEs in the sector have the

opportunity to grow and develop. Supply remains deficient, while demand is slowly rising driven by

3 For more info on the main actors, https://letswork.org/wp-‐content/uploads/2016/11/background-‐

report-‐review-‐of-‐current-‐key-‐sectors.pdf

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urbanization and the emerging middle class. Urban lower and middle class are still unable to afford investments in formal housing, despite the strong economic growth of the country. Moreover, growth is slowed down by the complex processes for obtaining a construction permit. Local

contractors and informal businesses dominate housing construction and the use of locally produced material. Despite the high competition within the sector, complaints about lack of skilled labor force and poor construction quality are common.

Public and civil construction

Public and civil construction are dominated by foreign firms, mainly from South Africa, China, and Portugal. As opposed to local companies, international companies are able to exploit their network with foreign investors and markets and can act flexibly, obtain financial credit, import labor and material, procure the contracts as well as deliver the needed assets to secure the contracts.

Moreover, the lack of skilled labor leads companies to provide in house training.

Building material

The construction material is divided in raw material (wood, sand, stone.), intermediate input (bricks, cement, steel, etc.), building components (electrical material, frames, etc.), and finishing elements (glass, paints, etc.). 91% of the companies dealing with building materials are micro and small enterprises, mainly located in the south of the country, unable to compete with international firms’

capacity and experience. Foreign companies have better links to foreign markets, importing

construction material with better quality and price. The limited pool of domestic suppliers is unable to deliver intermediate inputs to the highest international standards, and the existing procedures for importing goods (VAT procedure) is a burden for local enterprises, which are often not able to compete with the large international companies. Approximately 60% of building materials used in Mozambique is imported, mainly because companies believe that domestic suppliers fail to deliver on time and provide low-‐quality materials.

EXTRACTIVE INDUSTRIES

Only in recent years Mozambique has discovered its abundant reserves of natural gas and coal. The country’s first overseas export of coal came in 2011 from Tete Province. In 2012, four of the world’s five largest natural gas discoveries were made in Mozambique’s offshore Rovuma. A massive inflow of foreign investment financed mega projects such as Vale, Rio Tinto, Jindal, Anadarko, ENI, Sasol, among others, attracted by early estimates of the sheer volume of untapped natural gas and coal reserves. In 2011, the government a total amount of USD$3,4 billion in investments. Recently, the falling market prices for coal and gas has slowed down the expansion of production. However, the forecasts remain strong. The natural resource sector has propelled the country’s rapid growth during the last years, but its real impact on local economy remains weak.

Mozambique can rely on various natural resources including titanium, coal and natural gas. The extractive industry’s currently contributes, in taxation alone, 4.1 percent to the national gross domestic product (GDP), and it is expected to growth. However, the development of the sector has not led to any significant development outcomes in the rest of the local economy.

NATURAL GAS

The recent gas discovery in the north has made Mozambique globally relevant. Gas has been discovered in two areas, in the south in Inhambane and in the north, in the Rovuma Basin (Cabo Delgado). Exploration in the offshore Rovuma Basin in 2012 confirmed the natural gas volumes in excess of 100 Tcf (comparable with Norway), considered one of the largest natural gas reserves in the world.

CORAL OFFSHORE FEILD DEVELOPMENT

The most significant economic development of 2017 was the final investment decision by ENI (Italy) for the Coral offshore gas field first phase development. Its size is relatively small, with an estimated production of 3.4 million tons of gas per year. Despite being smaller than the Pande and Temane onshore fields that have been in production since the early 2000s under Sasol (South Africa) and the limited spill-‐overs that it will bring to shore, it constitutes the first development in the Rovuma basin.

COUNTRY STRATEGY PAPER