Mozambique – Country profile

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Background Located on the south-eastern coast of Africa, Mozambique has a varied climate with warm low-land areas in the south and cool temperatures towards the northern highlands. The country is rich in natural resources. Its mineral resources include coal, gold, titanium, bauxite and gemstones among others. In 2010, some of the world’s largest deposits of natural gas were discovered in Mozambique. While these mineral resources are largely under exploited, contributing to only 2.4% of GDP in 2012, the discovery of natural gas has spurred investment in the sector, , which became the fastest growing sector in 2013 (22% growth rate). Foreign direct investments (FDI) in mining more than doubled from USD 2.6 billion in 2011 to USD 5.2 billion in 2012, of which 78% was in the natural resources sector. Presently though, agriculture continues to contribute the largest share to GDP, making up 32% of GDP in 2013 and employing 70% of the total population. Mozambique is vulnerable to climate change, and climatic hazards such as droughts, floods and cyclones are occurring more frequently. The Government of Mozambique identifies climatic shocks and seasonal variability, deforestation, degradation of marine and land resources, loss of biodiversity, air pollution and inadequate environmental management as some of the major environmental challenges facing the country. Overall Fiscal and Economic Profile Mozambique is one of the fastest growing economies in Sub-Saharan Africa, with an average growth rate of 7.5% per year since 1993. In 2013, the GDP growth rate was 7.1%, mainly driven by increased foreign direct investment, and is expected to be over 8% in 2014. The inflation rate has been steadily low and was at 4.1% in 2013. Nevertheless, the country faces high levels of poverty. More than 50% of the population lives in poverty and rural residents and women are the most vulnerable. Illiteracy rates are also high, at 54% of the adult population. Mozambique’s fiscal deficit and debt have been growing, mainly due to increased spending on infrastructure. Increased government investment in infrastructure is aimed at developing the necessary facilities to support the booming extractive industry sector. Public expenditure rose from 33.4% in 2012 to 34.6% of GDP in 2013, and is expected to increase to 36.8% of GDP in 2014. Projections show a rise in the fiscal deficit from 6.9% in 2013 to 10.8% of GDP in 2014. Efforts, however, are being made by the government to generate higher revenues through improved revenue collection and widening the tax base, as well as making potential capital gains on share exchanges from gas field investors. Policy and Legal Framework for a Green Economy Launched in 2012, the Green Economy Roadmap is Mozambique’s main document defining the country’s green growth strategy. The objective of the Roadmap is to integrate natural resource planning into the national economic planning process in order to ensure sustainable growth and development. The Roadmap will serve to integrate green economy objectives into the long-term National Development Strategy (ENDE) 2015-2035, which aims to improve the quality of life through the transformation of the economy. Following the launch of the Roadmap, Mozambique adopted the Green Economy Action Plan for 2013/2014 in 2013. The Action Plan promotes the sustainable use of natural resources through the integration of the three pillars of sustainable development, namely economic, social and environmental development. The Plan will also inform the next Government of Mozambique’s 2015-2019 Five-Year Plan. In addition, the government has already begun implementing strategies targeting environmental issues. In 2007, the National Action Plan for Adaptation to Climate Change (NAPA) was adopted. Its main priorities included strengthening early warning systems (especially after the devastating floods of 2000 and 2013); strengthening the capacity of farmers to adapt to climate change; reducing the impacts of climate change along the coastal zone; and promoting water resource management. The NAPA was followed by the formulation of the National Strategy on Climate Change Adaptation and Mitigation (ENAMMC) for 2013-2025. It identifies climate adaptation and mitigation as national priorities, but also recognizes the opportunities that low-carbon development actions might provide. It targets the following areas for low-carbon development and mitigation: improving access to renewable energy; increasing energy efficiency; promoting low-carbon urbanization; developing low-carbon agricultural practices; reducing deforestation and wildfires; and managing coastal ecosystems. Fiscal Measures for a Green Economy Mozambique, like many other developing countries, needs to mobilize adequate financial resources and put in place institutional mechanisms for the implementation of green economy measures. Between 2007 and 2010, the government’s environmental expenditure was only 1.4% of GDP, although the estimated costs of reducing environmental degradation is estimated at 9% of GDP. Total environmental revenues are generally low, at 0.1% of GDP in 2010. In this context, increasing financial resources for natural resources management is of high priority for the Mozambican government. Green investment in key sectors is largely financed by the government and external donors. The government is thus looking for ways to increase public revenues, one of which is through improving revenue collection by strengthening tax authorities. In order to promote renewable energies, the government has developed a renewable energy atlas which will guide the Ministry of Energy on suitable projects that can enable the country to reach its goal of generating 55% of its energy from renewables. Furthermore, feed-in tariffs are being considered as an incentive for increasing investment in renewable energies. The Off-grid and Renewable Energy Strategy, approved in 2012, also promotes private sector investment and highlights the need for a commercial financing platform to make funding easily accessible. Additionally, it aims to stimulate knowledge and capacity building among the population in order to ensure the efficient utilization of renewable energy. In order to support local communities in their environmental protection programs, the government has established a mechanism that repatriates 20% of the fees paid for natural resource exploitation back to the local community living in the area. The mechanism has not worked as well as expected, as only part of the funds reach the target communities due to mismanagement. Also, a new Mining Law was passed in August 2014, which states that mining concession holders must first obtain an environmental license before beginning any operations. It is too soon to tell how effective the enforcement of the law and its environmental provisions will be. As previously mentioned, the discovery of vast natural gas reserves in the country has led to a boom in investments in the extractive sector. The government collected almost USD 1billion in revenues from taxes from natural gas-related deals in 2014, and cumulative estimates of these revenues are projected to reach USD 115 billion by 2040. Taxes from production and surface work by companies exploring natural resources alone rose from USD 1.44 million in 2012 to USD 15.8 million in 2014. In addition, a Natural Gas Master Plan was approved in June 2014. The Master Plan presents a strategy that will guide government decisions on how the resource and revenues generated will be utilized and invested once production begins in 2018. The government hopes to maximize the benefits from gas, in particular with regards to the sustainable development of Mozambique. Fossil Fuel Subsidy Reform In 2011, the size of Mozambique’s fuel subsidy was estimated at 1% of GDP. The Government had aimed to eliminate fuel subsidies by early 2012 by gradually raising fuel prices over six months in 2011. However, it extended the phase-out date after global oil prices rose during the Arab Spring. In this context, in 2009 the government enacted the Biofuel Policy and Strategy (PEB). The PEB provides guidelines on the expansion of the use of biofuels. By 2010, there were already 29 biofuel projects in progress in Mozambique, of which 13 were producing ethanol and 16 biodiesel. The PEB defined sugarcane and sweet sorghum as the raw materials for the production of ethanol whereas Jatropha Curcas Linn and coconuts will be used to produce biodiesel. In 2012, a mandatory 10% blending of biofuels with petrol and diesel came into force. Additional reading  UNEP (2015). Green Economy Fiscal Policy Scoping Study – Mozambique – Working Paper. Download here. UNEP (2015). Summary of Fiscal Policy Scoping Study – Mozambique. Download here.