Potential benefits and pitfalls of extractives in Mozambique --lessons from international experience.

Position:Research Brief

Mozambique has seen a significant expansion of interest and investment in its extractive industries. New gas finds in the past ten years have led to expectations that these industries will contribute very significantly to the country's future economic development and its long-term structural change.

Don't count your chickens before they're hatched--the perils of inflated expectations

The huge Rovuma gas fields in the north-east of Mozambique were discovered in 2009-11, and the specific plans to develop these are still in process. The 2016 projections from the International Monetary Fund (IMF) suggested that the total revenues for the state from the gas projects throughout their life cycle up to 2045 could reach some US$500 billion.

This projected boost from gas extraction has not yet materialized and delays of at least three years on the IMF numbers now seem likely. Instead, in 2016 the news gradually emerged of large undisclosed public-sector loans that together are probably equivalent to some 20% of Mozambique's GDP. Commentary on this matter has clearly linked these large loans to a build-up of new borrowing that started in 2013-14 based on the assumption that Mozambique would quickly become a global gas exporter. The undisclosed commercial loans breached Mozambique's own constitutional provisions, its budgetary ceilings, and its agreements with donors--including with the IMF, which consequently suspended its programme with the government in April 2016.

So the earlier very hopeful fiscal picture has been replaced by a perilous budgetary situation, and a seemingly unsustainable public debt. Mozambique's growth rate actually slumped from over 7% in 2015 to 3% in 2016. With rising inflation and a generally weaker investment environment some of the larger expected resource projects are at least questionable.

Macroeconomic and fiscal policy--lessons from international experience

International experiences can serve as a guide to support the analysis that is now needed, and to help identify and establish the broad Mozambican policy package that is called for. For example, from the evidence available, Mozambique is far from unique in allowing over-optimistic projections to encourage excessive borrowing and spending in premature anticipation of the boom to come. This type of experience has been seen in other significant African extractive producers, such as Nigeria, Ghana, and Chad. The challenge is to stop this happening again in Mozambique in...

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