MOZAMBIQUE: An Introduction
The Mozambican Economy
Economic growth in Mozambique is expected to accelerate to 5% in 2024. Growth prospects are more positive for the medium term, with GDP expected to grow by 8.3% in 2024, corresponding to USD72 billion, on the back of increases in liquefied natural gas production and exports and agriculture.
GDP per capita growth jumped 2.0% in 2023 and is expected to grow 5.5% in 2024.
Inflation is expected to average 7% during 2024, pushed mostly by domestic demand during an economic recovery, according to the latest report on the country by the Economist Intelligence Unit (EIU).
The fiscal deficit is projected to be 3.6% of GDP in 2024.
The current account deficit is projected to drastically increase to 35.9% in 2024, given imports of liquefied natural gas. Headwinds include climate shocks and the insurgency in northern Mozambique. Tailwinds include the liquefied natural gas sector as an energy supplier for the country’s electrification and just transition, government investment in agricultural productivity, and overall subregional growth, leading to higher usage of Mozambique’s logistics corridors.
According to the Mozambique government, the Economic and Social Plan and State Budget (PESOE) for 2024 aims to set annual macroeconomic targets, aiming to achieve a growth in GDP of 5% and maintain the average annual inflation rate at 11.5%.
In any case, the IMF’s figures, which usually serve as a barometer for the financial world, point to a 5% GDP growth in 2024.
According to World Bank Mozambique’s Economic Update notes, growth is expected to accelerate in the medium term, averaging 5.7% in 2024, as demand recovers further and the economy benefits from the start of LNG production in 2023 and anticipates the resumption of larger LNG projects. These are expected to stimulate the extractives sector, increase demand for services, and boost exports. Agricultural output growth is expected to remain significant, subject to favourable weather. However, substantial downside risks remain, including rising international oil and wheat prices owing to the war in Ukraine, natural disasters, and a deterioration in the security situation in northern Mozambique, which may increase public spending pressures, among others.
In December 2023, Mozambique and the IMF team reached a staff-level agreement on the economic and financial policies that could support the approval of the First Review of the programme under the ECF arrangement.
The IMF Executive Board completed the Third Review under the Extended Credit Facility (ECF) Arrangement for Mozambique, providing the country with access to USD75 million.
Programme performance has been satisfactory. Parliamentary approval of the Sovereign Wealth Fund bill in December 2023 was an important step toward ensuring transparent and sound management of natural resource wealth.
“All quantitative and structural benchmarks set for the first review have been met and good progress was made on the broader structural agenda. Looking ahead, the macroeconomic environment remains challenging”.
“The authorities aim to continue implementing their ambitious economic reform agenda, including a sovereign wealth fund law, reform of public sector remuneration, and the amendment of the public probity law”.
The Washington-based institution welcomed the Bank of Mozambique (BoM) response to contain inflation, which it called “proactive”.
The volume of exports from Mozambique registered USD1.7 billion in the first half of 2023, an increase of 4.4%, when compared with same period in 2022, according to the Quarterly Balance of Payments Report, unveiled by the BoM. The positive evolution of registered revenues is essentially justified by the growth in sales of products exported by mega-projects, with emphasis on the extractive industry (natural gas, heavy minerals, sands and rubies, sapphires and emeralds) with an increase of USD280 million.
On 14 November 2022, Mozambique flagged off its first shipment of liquefied natural gas, exports that could help ease Europe’s energy crunch as Russia squeezes supplies. For Mozambique – one of the world’s poorest nations - it marks the end of a decade-long wait to monetise one of Africa’s largest offshore gas fields. Mozambique has set high hopes on vast natural gas deposits – the largest ever found south of the Sahara – that were discovered in the northern Cabo Delgado province in 2010.
China is one of Mozambique’s largest trading partners and is also a large financier and constructor of public infrastructure in Mozambique. It has also been involved in the LNG Rovuma Basin Project through the China National Petroleum Corporation group, which has reportedly already invested more than USD5 billion in the consortium of the Area 4 block in the Rovuma Basin, led by the Italian multinational Eni, where China National Petroleum Corporation has an indirect stake of 20%. South Africa, Portugal, India and Japan are also important trading partners and have been increasing their investments.
Foreign Investment in Mozambique
The government of Mozambique encourages foreign investment and the country offers significant investment opportunities in various sectors, such as agriculture, fishing and aquaculture, extractive industries, tourism, public infrastructure, natural resources and energy. Investment, including foreign investment, is subject to specific legislation.
The Mozambican government estimates that foreign direct investment (FDI) in the country should more than triple in 2024, driven by the natural gas exploration business, to USD4.537 billion, according to the state budget proposal for 2024.
In the documents supporting the proposal for the PESOE for 2024, the government points to a growth in FDI of USD1.425 billion, in the estimate for this year, to USD4.778 billion next year.
Despite the 235% increase, FDI attracted to Mozambique is still unlikely to recover next year from the falls in 2022 – USD1.975 billion – and 2023, “due to disinvestment by companies in the coal industry”, given the peak of more than USD5.101 billion in foreign investment attracted in 2021.
“With regard to foreign direct investment (FDI) for 2024, an improvement is expected, mainly influenced by the resumption of investments by Total Energies in the Rovuma Basin”.
In the PESOE report for 2024, the government also estimates a “notable increase in imports of specialized services by the major projects” underway in the country, as well as the “resumption of operations by Total Energies”, the French multinational’s project in Cabo Delgado.
The Mozambican government approved the Investment Law and Regulation to promote and foster foreign investments in the country, granting various benefits and incentives which include tax and custom duties exemptions, free remittance of funds and the possibility of hiring more foreign workers than those permitted by law. These incentives will vary according to the economic and industrial activity pursued and the region of implementation of the project in the country.
Private foreign and national investments are granted a set of benefits, which include, among others, deductions from the taxable amount in the scope of corporate income tax and exemptions from custom duties on imports. The minimum eligible value of direct foreign investment for the purposes of the benefits referred to above is MZN7.5 million (approximately USD117,000 – note that the principle is that at least USD100,000 shall be invested).
Investment projects approved under the legislation are eligible for the following benefits, based on their location and/or activity:
(i) guarantee of protection of ownership rights;
(ii) guarantee of the transfer of funds (profits or dividends, royalties, amortisations and interest from loans and foreign capital invested and re-exportable abroad; and
(iii) grant of tax benefits.
The Investment Law and the Tax Benefits Code apply to investments of an economic nature carried out in Mozambique which intend to benefit from the guarantees and incentives set above, including those investments carried out in industrial free zones and in special economic zones, regardless of the nationality and the nature of the investor. Notwithstanding, this legislation shall not apply to investments made or to be made in the areas of prospecting, research and production of petroleum and gas and in mineral resources extraction industries, which are governed by sector-specific legislation.
Dispute Resolution and Bilateral Investment Treaties
Mozambique is a signatory to the Washington Convention of March 1965 relating to the Settlement of Investment Disputes. Under the investment law, the state agrees to submit disputes with foreign investors to arbitration.
The Investment Law contemplates the following possible arbitration mechanisms:
• Arbitration through the International Centre for the Settlement of Investment Disputes (ICSID) under the Washington Convention of March 1965 relating to the Settlement of Investment Disputes (the “ICSID Convention”);
• ICSID arbitration under the ICSID Additional Facility Rules to the extent that the investor is a national of a state that is not a signatory to the ICSID Convention; and
• International Chamber of Commerce Arbitration in Paris. The Multilateral Investment Guarantee Agency (MIGA) – a World Bank affiliate – insures against political risks in Mozambique.
Foreign investors should also take into consideration the protection provided by bilateral investment treaties when structuring their investments. To date, Mozambique has entered into Bilateral Investment Treaties with the following countries: Algeria, Belgium, China, Cuba, Denmark, Egypt, Finland, France, Germany, India, Indonesia, Italy, Mauritius, the Netherlands, Portugal, South Africa, Spain, Sweden, Switzerland, the United Kingdom, the United States, Vietnam and Zimbabwe.
In addition, it has treaties for the avoidance of double taxation in place with the following countries: Botswana, India, Italy, Macau, Mauritius, Portugal, South Africa, the UAE and Vietnam.