Outlook for 2011-12

• The ruling party, Frente de Libertação de Moçambique (Frelimo), is set to remain hegemonic in 2011-12, but there is a risk of internal splits emerging as candidates to succeed Armando Guebuza as president in 2014 emerge.
• The risk of widespread social unrest, particularly in poor urban areas, cannot be discounted, particularly given the outlook for sharp rises in global food prices in 2011.
• Policy will be guided by the three-year policy support instrument with the IMF and the five-year strategy paper, Programa Quinquenal do Governo para 2010-14. Both target poverty reduction and economic diversification.
• The fiscal deficit in 2011 is forecast at the equivalent of 5% of GDP, falling to 4.4% of GDP in 2012 as subsidies are unwound. The deficit will be funded overwhelmingly by concessional loans from donors.
• Real GDP growth is expected to remain brisk in 2011-12, averaging 7.4% a year, on the back of increasing inflows of foreign aid and foreign direct investment into minerals and infrastructure mega-projects.
• In line with the latest outlook for global commodity prices and expected losses to local agricultural output resulting from flooding, inflation is now forecast to average 7.5% in 2011, before easing to 5% in 2012.
• The current-account deficit is forecast to narrow from an estimated 11.9% of GDP in 2010 to 11.2% of GDP in 2011 and 9.0% of GDP in 2012.

Monthly review

• In late March a former minister of the interior, Almerino Manhenje, was sentenced to two years in prison after being convicted of financial impropriety committed during his period in office (1996-2005).
• In a separate case, the chairman of the constitutional council, Luis Mondlane, who is in effect the country's most senior judge, resigned on March 17th after local media reports alleged that he had misused council funds.
• A recent report has revealed large discrepancies in accounts of mining taxes and royalties paid by firms and recorded by the government. However, critics of the report claim that this was owing to different accounting methodologies.
• In mid-March the World Bank approved a loan to the Mozambican government of US$70m towards a project to develop agriculture known by the acronym PROIRRI.
• In late March a UK-Australian firm, Rio Tinto, announced that it would lift conditions on its bid for Riversdale of Australia, which holds coal production licences for around 250,000 ha in the Tete-Moatize area of Mozambique.

The ruling party, Frente de Libertação de Moçambique (Frelimo), is set to remain the dominant figure in the political and economic landscape throughout the forecast period, following its crushing but flawed victory in the legislative and presidential elections held in October 2009. After more than five years in power, the president, Armando Guebuza, has consolidated his influence and can rely on the support of the security services. Mr Guebuza's micromanagement and the centralisation of power in the presidency have weakened the tradition of debate inside Frelimo. As a result, there are grave concerns that this is undermining the effectiveness of government decision-making and management. Moreover, there are reports that Mr Guebuza's high-handed style and perceived cronyism are alienating many within Frelimo. A split within the ruling party is thus conceivable, possibly pitting the new generation of meritocrats against the old guard of civil war veterans. The risk of this is set to increase as the presidential election in 2014 approaches.

Bloody riots that erupted in September 2010 in the capital, Maputo, over the cost of living pose a greater threat to Frelimo's hegemony than do the enfeebled opposition parties. The unrest was brutally repressed by the security services, resulting in several deaths, before the government was forced to capitulate and reinstate some price controls. Although the restoration of food subsidies and cuts to planned price increases for water and electricity are likely to assuage popular anger in the short term, widespread subsidies are fiscally unsustainable, particularly given rapid commodity price rises on global markets. Moreover, the government's acquiescence may set a precedent for social unrest to win concessions. Consequently, the risk of further such instability in 2011-12 is considerable. In addition to price rises, other triggers for future unrest could include power cuts, a localised rise in unemployment or a delayed official response to a disease outbreak or flooding. Overall, the Economist Intelligence Unit expects political stability to deteriorate slightly in the forecast period.

The next national and presidential elections are not due until late 2014. However, before then jockeying for position is likely among potential successors to Mr Guebuza, who cannot serve another term in office. The political opposition will undergo significant change over the next few years, as the previously dominant opposition party, Resistência Nacional de Moçambique (Renamo), is in disarray and may gradually be supplanted by a new challenger, the Movimento Democrático de Moçambique (MDM), to which it is losing talent and support. There are signs of a split emerging within Renamo, with many members growing frustrated with the leadership of Afonso Dhlakama, who is viewed as becoming increasingly out of touch. However, the MDM will have to work hard to capitalise on Renamo's weakness, as the party has yet to make much impact outside Beira, where its leader, Daviz Simango, is mayor.

The government will remain highly dependent on aid from donors, which accounts for around one-half of fiscal revenue. Although the relationship with donors has been damaged by concerns over governance, we do not expect significant deterioration in relations or a major drop in aid inflows. Ties with South Africa, Mozambique's main trading partner, will remain strong, driven by foreign direct investment (FDI) inflows and long-standing commercial links. Strong commercial, political and personal ties will ensure continued close relations with Portugal, which will remain a key source of FDI and diplomatic support. Investment from China, Brazil and India, particularly in railways and mining, will help to strengthen ties with those countries.

Policy in the outlook period will be guided by the three-year policy support instrument (PSI) agreed with the IMF in June, as well as the government's five-year strategy paper, Programa Quinquenal do Governo para 2010-14, which is implemented through annual social and economic plans (Planos Económicos e Sociais). The objectives of the latest PSI include unwinding some of the fiscal stimulus policies enacted during the global economic slowdown between 2008 and 2010. The PSI aims to keep the primary deficit stable and to develop a debt-management strategy. The five-year strategy, meanwhile, aims to cut poverty, improve social development and foster key sectors, including agriculture, fishing, minerals, tourism and transport. A programme of reforms to tax policy and collection, public financial management and the supervision of banks will continue from the previous PSI. However, progress in these structural reforms is expected to be slow, owing to both the scale of the challenges to be overcome and the fact that many officials have vested interests in preserving the inefficient status quo.

The 2011 budget, approved by parliament in December, provides for total expenditure of MT132.4bn (US$4.1bn), which we forecast at equivalent to an officially forecast 31.1% of GDP. Current spending, one-half of which is accounted for by public-sector wages, is budgeted at MT68.8bn. This is just over 50% of total spending and forecast at equivalent to 18.3% of GDP. Capital spending of MT60bn (around 16% of GDP) is set to rise by nearly 15% on the latest estimates of executed spending in 2010. Investment in agriculture is budgeted at just MT1.6bn, less than 10% of the MT19bn allocated to capital spending on infrastructure. Education and health, meanwhile, are set to receive MT3.6bn and MT2.3bn in capital spending respectively. As regards revenue, the domestic component is expected to rise by a brisk 19.5% on the latest estimates for outturn in 2010, to MT73.3bn. The increase is expected to be led by higher income tax receipts, which are projected to rise by 34% on 2010 estimates to MT23.4bn, on the back of rapid economic growth and improved collection. External revenue is budgeted at MT58.1bn (44% of the total). Total revenue is set to rise by nearly 15% on the latest estimates of outturn in 2010. Overall, we expect a fiscal deficit equivalent to 5% of GDP in 2011.

We expect foreign aid to stagnate in real terms in 2012, although domestic revenue should continue to pick up strongly on the back of still rapid growth. We expect spending growth to be slower in that year as subsidies are slowly unwound. Consequently, we expect a slightly narrower fiscal deficit in 2012, equivalent to 4.4% of GDP.

In 2011 we expect that the key policies of the central bank, Banco de Moçambique (BDM), will be to restrain money supply growth and keep the currency, the metical, steady in order to check imported inflation, which poses a threat to social stability. The BDM is expected to let the currency weaken slightly in 2012, in order to boost export competitiveness and take advantage of the forecast drop in global commodity prices. Although the BDM formally targets sustainable levels of monetary aggregates, policy will increasingly prioritise keeping inflation in check, even if this requires further strengthening of the metical.

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We estimate real GDP growth of 8.5% in 2010, driven by the minerals sector. Growth is expected to remain brisk in 2011 on the back of increasing inflows of FDI into minerals and infrastructure mega-projects, as well as ongoing donor contributions. Agriculture will benefit from growth in the output of food and cash crops, as well as from the implementation of the government's national food production plan. The recent flooding in the south of the country will have a negative impact on agricultural output, albeit a relatively small one, as the main producing regions are in the north. Moreover, this loss of agricultural production may be offset by the boost to construction from repairs to flood-damaged infrastructure. Output from industry is expected to rise briskly on the back of strong inflows of foreign investment into the minerals sector, particularly to develop coal reserves. However, industrial production will remain below potential owing to the fitful power supply. The services sector is also expected to continue the strong performance registered in 2010. In particular, the hotel and restaurant sector and financial services are expected to maintain double-digit growth as tourism and foreign interest in the country's banking sector pick up. Growth is expected to ease in 2011, to a still rapid 7.3%, in line with tougher global economic conditions, before picking up slightly in 2012, to 7.5%, largely on the back of increased coal production.

World commodity prices are expected to rise briskly in 2011. Of particular relevance to inflation in Mozambique is the outlook for global food prices, as the country is highly dependent on imports of food, which has a heavy weighting in the consumer price basket. We expect global food prices to rise by nearly 20% in 2011. However, government subsidies will lead to a lower local inflation rate, which we forecast at an average of 7.5%. World commodity prices are expected to ease slightly in 2012 as monetary policy tightens worldwide, encouraging a withdrawal of investment from commodities (speculation having partly driven the rapid rise in prices in 2010). However, the government is likely to use this opportunity to withdraw fiscally unsustainable subsidies, so the impact on inflation will be broadly neutral. Consequently, we expect inflation to ease only slightly in 2012, to an average of 5%.

In view of recent rapid imported consumer price inflation, efforts to reduce the metical's overvaluation to boost export competitiveness are now likely to be put on hold. Through its interventions, the BDM appears to have put a floor under the value of the metical at around MT37:US$1 and MT5.1:R1 since July 2010. We expect the recent unrest over the cost of living to encourage the authorities to let the metical strengthen slightly amid strong expected inflows of foreign investment in 2011. The BDM will probably seek to hold the value of the metical steady in 2012 at a level that limits imported inflation without eroding the country's export competitiveness through strong appreciation. Consequently, we forecast that the exchange rate will average MT32:US$1 in 2011 and MT31:US$1 in 2012.

The outlook for Mozambique's aluminium-dominated exports is positive, as global demand is expected to grow by an average of 6% a year in 2011-12, even though prices are set to moderate in 2012 after a brisk rise in 2011. The other two main exports, gas and electricity, are governed by fixed contracts with buyers in South Africa that are priced in rand, and any changes in value will reflect fluctuations in the rand:dollar exchange rate. We have revised our export forecast for 2011 down slightly this month, as coal exports may be delayed owing to a lack of infrastructure. However, the planned expansion of gas exports will have a positive impact by 2011. Agricultural export volumes are expected to increase in response to government investment in the sector. We expect total goods exports to rise from an estimated US$2.7bn in 2010 to US$3.3bn in 2011 and US$3.5bn in 2012. Goods imports will also rise strongly in 2011-12, to an average of US$4.5bn, from an estimated US$3.6bn in 2010, given the outlook for sustained high oil prices and the demand from large-scale investment projects in minerals and infrastructure. Overall, the trade deficit will narrow from an equivalent of 9.5% of GDP in 2011 to 7.8% of GDP in 2012.

The services deficit is expected to drop from US$523m in 2010 (an estimated 5.5% of GDP) to an average of US$483m (3.9%) in 2011-12 as an increase in service imports for the mining sector is more than offset by a recovery in service exports from the tourism and transport sectors. The income deficit will rise in nominal terms in line with profit repatriation by foreign firms, but owing to rapid economic growth it will fall as a proportion of GDP, equivalent to 4.3% and 3.8% of GDP in 2011 and 2012 respectively. In view of the tensions between Frelimo and the country's donors, aid pledges are set to stagnate in 2011-12, so the transfers balance will rise in dollar terms but will fall as a share of GDP, averaging US$798m or 6.4% of GDP. Overall, the current-account deficit is forecast to narrow from an estimated 11.9% of GDP in 2010 to 11.2% of GDP in 2011 and 9% of GDP in 2012.

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In late March a former minister of the interior, Almerino Manhenje, was sentenced to two years in prison after being convicted of financial impropriety committed during his period in office (1996-2005). Although the list of charges against him had been reduced by the supreme court on appeal, Mr Manhenje was convicted of various offences relating to the unauthorised use of public money, often for the benefit of himself and his family. The former minister refused to answer questions during his trial, which took place in December, on the grounds of "national security". After the sentence was announced Mr Manhenje's lawyer stated his intention to appeal against the verdict. A former director and a deputy director in the Ministry of Finances, Rosario Fidelis and Alvaro de Carvalho respectively, were also convicted of related offences and given the same jail term. Furthermore, following related official investigations, a local newspaper, Noticias, reported on March 10th that 13 police generals had been charged with the theft of state funds.

Meanwhile, in a separate case, the chairman of the constitutional council, Luis Mondlane, who is in effect the country's most senior judge, resigned on March 17th after local media reports alleged that he had misused council funds to make mortgage payments on a house he owns and finance other personal expenses. While this matter was under investigation by the council, Mr Mondlane faced fresh accusations in late March. The remaining members of the council accused him of abuse of process for having sent a letter on March 22nd to the Ministry of Finances requesting documents about the council's financial affairs, which he signed as chairman of the council despite having resigned his post five days earlier. The council announced that its former chairman could face criminal proceedings for this alleged act of "impersonation".

As is often the case with graft cases, these scandals give grounds for both optimism and pessimism about institutional quality. On the one hand, the fact that the local media were able to investigate and publish serious allegations about senior officials is encouraging. Equally, that such allegations have led to the imprisonment of a former minister and two senior ministry officials, and look set to prompt the prosecution of the country's most senior judge, could indicate that the powerful do not enjoy impunity.

However, on the other hand the fact that such senior figures have been accused of corruption is by no means grounds for celebration. Sceptics may conclude that these two scandals indicate that senior officials can generally perpetrate corrupt acts with impunity, and that the accused in these instances were simply unlucky to become the subject of media investigations. Moreover, the two-year jail terms handed down to Mr Manhenje, Mr Fidelis and Mr de Carvalho were arguably lenient. The three were convicted on the basis of "budgetary irregularities" rather than the more serious charge of stealing state funds, which can result in a prison sentence of up to 20 years. The ostensible reason for this is that ministers and senior officials do not personally authorise spending, but rather delegate to subordinates. However, this provision in effect spares ministers and high-ranking civil servants from facing the full force of the law when accused of corruption. Another indication of shortcomings in the judicial system is the fact that Mr Manhenje's conviction happened six years after he left office and more than two years since his arrest in September 2008.

In the latest edition of the Corruption Perceptions Index published by a global anti-graft watchdog, Transparency International, Mozambique scored just 2.7 out of a possible maximum of 10, placing it 116th out of 178 countries surveyed. This assessment was identical to that of neighbouring Tanzania, and slightly better than those of Zimbabwe (scoring 2.4 and ranked 134th) and Madagascar (2.6 and 123rd). However, other neighbouring countries fared better: South Africa's score of 4.5 put it 54th globally, while Zambia was ranked 101st with its score of 3.

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