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 forecast to average 7.5% in 2011, before easing to 5% in 2012.
• Owing to the lower growth estimate for 2010, the current-account deficit is forecast to narrow from 13.7% of GDP in 2010 (previously 11.9%) to 12.8% of GDP in 2011 and 9.6% of GDP in 2012 (previously 11.2% and 9% respectively).

Monthly review

• The government has announced plans to purchase another 222 buses to operate routes in the capital, Maputo, and has preliminarily agreed to build a train route linking Maputo with the suburb of Matola.
• The IMF has made a broadly positive assessment of Mozambique's economic policy performance following a mission to the country that concluded on April 7th, as part of the annual Article IV consultations.
• The government announced on March 29th that it would abolish the controversial subsides for fuel and wheat flour. It intends to replace these with more targeted-albeit still very costly-programmes.
• The government has said that it will push ahead with plans to redevelop a former military airbase at Nacala, in Nampula province, into an international airport, despite the apparent lack of tourist or business demand locally.
• Plans to build several new cement factories have been announced, which could triple national production of the commodity to meet soaring demand.

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 therefore 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. The government's acquiescence may set a precedent for social unrest to win concessions. New schemes to supply subsidised fuel and food to the most vulnerable groups should assuage popular anger in the short term. However, the imminent withdrawal of general price subsidies may provoke the ire of groups that miss out. Moreover, even the new scheme is fiscally unsustainable, particularly given rapid commodity price rises on global markets. 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 2010, as well as the government's five-year strategy paper, Programa Quinquenal do Governo para 2010-14. 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), officially forecast at equivalent to 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, and in view of our lower growth estimate for 2010, we now expect a fiscal deficit equivalent to 5.7% of GDP in 2011 (previously 5%). 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 4.8% of GDP (previously 4.4%).

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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According to the latest IMF estimate, real GDP grew by 6.5% in 2010, down on the 8.5% previously estimated. 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 attract increasing amounts of foreign investment. Growth is expected to accelerate to 7.3% in 2011 and 7.5% in 2012, 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 30.3% 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 weaken 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. Coal exports could make a significant contribution from late 2011, but they may be delayed owing to a lack of associated infrastructure. The planned expansion of gas exports should have a positive impact by end-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$3.4bn in 2011 and US$3.6bn 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 10.1% of GDP in 2011 to 7.8% of GDP in 2012.

The services deficit is expected to drop from US$522m in 2010 (an estimated 6.1% of GDP) to an average of US$517m (4.6%) 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 keep broadly steady as a proportion of GDP, at 4.5%. 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$762m or 6.8% of GDP. Overall, the current-account deficit is forecast to narrow from an estimated 13.7% in 2010 in view of our lower growth estimate (compared with 11.9% previously) to 12.8% of GDP in 2011 (previously 11.2%) and 9.6% of GDP in 2012 (previously 9%).

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Having recently purchased 167 buses for a state-owned transport company, Transportes Publicos de Maputo, the government has now announced plans to buy another 222 later this year. The move is an attempt to address the severe problems that have plagued the sector since earlier this year (March 2011, The political scene). What has been called a "crisis" in urban transport followed a poorly conceived crackdown earlier this year on private operators of chapas, the 15-seat minibuses that have dominated urban transport in Mozambique for two decades. Many operators' licences were suddenly revoked or withdrawn and police enforcement stepped up. The result has been to throw public transport into chaos. The government's preferred option is to promote the use of larger buses and build the capacity of the state-owned bus company, neither of which is capable of filling the void left by the chapas in the short term. In an address to parliament on March 16th the transport minister, Paulo Zucula, did not acknowledge how unhelpful the government's intervention had been. Rather, he blamed the decline in the number of chapas on the roads on a decision by operators to withdraw from less profitable routes. Otherwise his address focused at length on the investments that the government is making in urban transport, drawing from the recently created Transport Development Fund.

Meanwhile, Mr Zucula has signed a preliminary agreement with an Italian company to build a subway train route linking Maputo with the suburb of Matola. The company is to co-finance a feasibility study into the project. There is concern that the authorities are increasing state spending and subsidies on urban transport without due cause, as this is an area in which the private sector, and particularly the chapa operators, has hitherto broadly met demand. The state bus company is known to be operationally inefficient, with a large proportion of its buses out of operation at any given time. That the government is contemplating a costly subway system is regarded as an extravagance for a poor country such as Mozambique. It would also result in an increase in public debt, which has been occurring at an alarming rate in recent years since the government benefited from a write-off of its debt stock under the heavily indebted poor countries (HIPC) initiative. Much of the new debt has been for politically driven spending decisions or prestige infrastructure and other projects weakly integrated with national priorities for poverty reduction.

The IMF has made a broadly positive assessment of Mozambique's economic policy performance following a mission to the country that concluded on April 7th, as part of the annual Article IV consultations between the Fund and member states. The IMF has also concluded the second review of the policy support instrument (PSI). The Fund noted the resilience of the Mozambican economy, with real GDP growth reaching a brisk 6.5% in 2010, although this was slightly below expectations. Nonetheless, the IMF expects growth to accelerate in 2011, buoyed by mega-projects, particularly in the mining sector, and returning to the levels experienced before the beginning of the global economic crisis in 2008. The Fund noted that, although export growth had more than offset the rise in the import bill owing to the spike in global fuel and food prices, rising commodity prices had stretched household budgets, particularly those of the poorest. Accordingly, the IMF has endorsed the authorities' focus on maintaining tight monetary policy to bring inflation into single digits by the end of the year.

The government is to continue and deepen its medium-term development strategy. This is based on investment in infrastructure and priority social spending, as well as its structural reform agenda, involving public financial management, tax administration, debt management, and financial sector development and supervision. A new poverty-reduction strategy, known by the Portuguese acronym PARP, is to be finalised and submitted to cabinet shortly. The PARP is expected to give greater clarity and direction to the government's aim of making economic growth more inclusive, by creating jobs and accelerating poverty reduction. Success in these areas will require stronger commitment to structural reforms and policies to raise productivity, particularly for labour-intensive industries, where performance has lagged behind the country's rapid rates of overall economic growth. Improving agricultural productivity, which is still far below the average for Sub-Saharan Africa, is a priority. Policies for social protection, meanwhile, will need to be fiscally sustainable and targeted more effectively at the vulnerable, rather than involving general programmes that often benefit richer groups. Mozambique's Article IV consultation and PSI are scheduled to be discussed by the board of the IMF in June.

The government announced on March 29th that it would abolish the controversial subsides for fuel and wheat flour. Instead, the government is to use targeted programmes in the ostensible hope of maximising the benefit to the poor. The government's plan is to issue cards to students and workers entitling them to cheap fuel from August, when the fuel general subsidy will be withdrawn. However, this intervention also appears to be poorly targeted in terms of alleviating hardship among the poorest, as neither students nor those in employment can be considered to be among the most vulnerable. Rather, the government is probably keen to offer sweeteners to these groups, as they are among the most likely to mobilise for destabilising demonstrations. Nonetheless, the rise in fuel prices that will follow the end of the general price subsidy still poses significant political risks for the authorities.

Wheat and rice subsidies will be replaced in June by a new scheme providing a subsidised basket of goods, worth around MT824 (US$26) a month, for people with monthly earnings of less than MT2,500. Although this is more targeted than a general price subsidy, a government spokesman, Victor Borges, has estimated that nearly 2m people could benefit from the programme. Thus, depending on take-up, the new scheme represents a multi-million-dollar liability for the government. In a gesture of solidarity, the government announced that salaries for ministers and other high-ranking state officials would be frozen.

Since the authorities introduced fuel and bread subsidies the programmes have been criticised as an inefficient and costly use of public funds for achieving poverty reduction. Fuel subsidies were meant to address rising urban transport prices, although the measure benefited the poor and non-poor alike, as all strata of society use either public or private transport. Moreover, there have been reports that some of the subsidised fuel was smuggled to neighbouring countries. Consequently, Mozambique's fuel import bill-and the cost of the subsidy-has risen sharply. The government paid fuel importers US$147m to cover the subsidy last year and has still not fully covered outstanding costs, which are to be paid off in the coming months. The decision to provide wheat flour subsidies, essentially for bread, has been criticised as inefficient for similar reasons, but also because bread is not a traditional staple food in Mozambique but rather an aspirational product favoured by urban and wealthier populations. Maize meal and other coarse grains remain the staple diet for much of the population of Mozambique, particularly the poor. However, the overriding concern of the government has been to avoid a repeat of the bloody unrest that the withdrawal of subsidies sparked in September 2010.

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Continuing its policy of heavy investment in infrastructure, the government is pushing forward with a plan to redevelop a former military airbase at Nacala, in Nampula province, into an international airport. The scheme was officially launched in May 2010, but little progress has since been made. The contractor carrying out the work is a Brazilian engineering company, Odebrecht. Work is now due to begin in May this year, with completion scheduled for early 2012.

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The scheme to develop the former airbase-which has not operated as an air force facility for decades-has existed for some time. However, questions remain over its viability, including where traffic for an international airport might come from. Nacala is a small port city on the coast of Nampula province, far from prominent tourist or commercial draws. The province's main centre is Nampula city, which is located 200 km inland and which has an existing international airport. It is therefore unclear what could justify such a large investment. The scheme is the latest of several public investments in airport infrastructure, including the redevelopment of Maputo international airport and international airports at Pemba and Vilanculos, the latter two of which are prominent centres for the tourist industry.

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Another international mining company has entered Mozambique's burgeoning coal sector. A UK-listed company, Beacon Hill, has paid US$42m for the coal assets of a US firm, Global Minerals and Metals, at Moatize, in Tete province. The coal resource concerned is estimated to be in excess of 450m tonnes.

Among other mining sector developments, another UK-listed company, Pan African Resources, won a mining licence in April for its Manica gold exploration project. This allows the company to move ahead with its plans for development of the project, for which a feasibility study has already been completed. Although Mozambique's mining sector is now dominated by multi-billion-dollar investments in the coal sector, it is the gold sector that has hitherto been the main player. Manica province has historically been the centre of gold mining in Mozambique.

Three Chinese firms have announced plans to build cement factories in Maputo province, which will be operative by 2012. One of the companies, Africa Great Wall Cement Manufacturer, has announced plans for a cement plant near Magude, with capacity to produce some 500,000 tonnes/year (t/y); the factory is projected to cost US$78m. Another company, China International Fund, has already begun building a factory near Salamanga-in Matutuine district, south of Maputo-at a projected cost of US$72m. The firm hopes to produce around 800,000 t/y of cement from the plant. A third firm, GS Cimento, plans to build a facility in Beloluane industrial park in Boane, near the Mozal aluminium foundry, with capacity to produce around 550,000 t/y of Portland cement. The cost of the project is expected to reach US$100m. Furthermore, a fourth Chinese company, Bill Wood, has expressed interest in building a plant in Cheringoma district, Sofala province. Finally, South Africa's Pretoria Portland Cement (PPC) announced an investment in December 2010 of US$200m for a cement plant in southern Mozambique with a capacity of 600,000 t/y.

Cement production in Mozambique may triple to 4m t/y by 2013 to supply the booming market if these projects are concluded as planned. Currently, total national production from five different facilities is estimated at 1.3m t/y, of which the market leader, Cimentos de Moçambique (owned by Cimpor of Portugal), accounts for some 700,000 tonnes, according to Cimpor's figures. The US Geological Survey estimates output of the higher-grade hydraulic cement, which keeps its strength even when wet, at 777,000 tonnes in 2009. The sharp expansion in cement capacity is intended to meet booming demand from the construction market in Mozambique, with mega-projects in mining, energy and construction being the principal sources of demand.

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Please see graphic below

Please see graphic below

Please see graphic below

Land area

799,380 sq km

Population

22m (2010, World Gazetteer estimate)

Main towns

Population, 2010 (World Gazetteer)

Maputo (capital): 1,888,144(a)

Nampula: 534,820

Beira: 440,404

Chimoio: 259,211

Nacala: 221,371

Quelimane: 204,705

Tete: 169,967

Pemba: 160,525

(a) Including Matola and Maputo province.

Climate

Tropical and subtropical

Weather in Maputo (altitude 59 metres)

Hottest month, February, 22-31°C (average daily minimum and maximum); coldest month, July, 13-24°C; driest months, July, August, 13 mm average rainfall; wettest month, January, 130 mm average rainfall

Languages

Portuguese (official) and three main African language groups: Makua-Lomwe, Tsonga and Sena-Nyanja

Measures

Metric system

Currency

Metical (MT)

Time

2 hours ahead of GMT

Public holidays

January 1st (New Year's Day), February 3rd (Heroes' Day), April 7th (Women's Day), May 1st (Labour Day), June 25th (Independence Day), September 7th (Victory Day), September 25th (Armed Forces Day), November 10th (Maputo City Day-Maputo only), December 25th (Family Day)

Official name

República de Moçambique

Form of state

Unitary republic

Legal system

Based on Portuguese-Roman law and the 1990 constitution, updated in 2004

National legislature

250-member Assembleia da República (parliament) elected by direct, universal suffrage every five years

National elections

October 28th 2009 (legislative and presidential); next national, provincial and presidential elections are due in late 2014

Head of state

President, chosen by direct universal suffrage

National government

The president and his appointed prime minister and Council of Ministers; new cabinet appointed in January 2005; last reshuffle in October 2010

Main political parties

Frente de Libertação de Moçambique (Frelimo) is the ruling party and holds 191 parliamentary seats; the main opposition party is Resistência Nacional de Moçambique (Renamo; 51 seats); the Movimento Democrático de Moçambique (MDM; 8 seats) was formed in March 2009 with the mayor of Beira, Daviz Simango, as its leader; it is drawing strong support from disaffected Renamo members and is bidding to replace Renamo as the main opposition party; another opposition party, Partido Humanitário de Moçambique (Pahumo), was launched by former Renamo members in April 2010

President: Armando Guebuza

Prime minister: Aires Bonifácio Ali

Ministers in the presidency

Parliamentary affairs: Adeleaide Amurane

Social affairs: Feliciano Gundana

Key ministers

Agriculture: José Pacheco

Defence: Filipe Nhussi

Education: Zeferino Martins

Energy: Salvador Namburete

Environmental co-ordination: Alcinda Abreu

Finance: Manuel Chang

Fisheries: Victor Manuel Borges

Foreign affairs & co-operation: Oldemiro Baloi

Health: Alexandre Manguele

Industry & trade: Armando Inroga

Interior: Alberto Mondlane

Justice: Maria Benvinda Levi

Labour: Helena Taipo

Mineral resources: Esperança Bias

Planning & development: Aiuba Cuereneia

Public works & housing: Cadmiel Muthemba

Science & technology: Venâncio Massingue

State administration: Lucas Chomera

Tourism: Fernando Sumbana

Transport & communications: Paulo Zucula

Women's affairs & social welfare: Iolanda Cintura

Central bank governor

Ernesto Gouveia Gove