The first part of this Economic Update assesses Mozambique’s economic recovery from the COVID-19 crisis, and its outlook. The thematic section (Part II) discusses the potential offered by agriculture to promote a sustainable and more inclusive recovery, and outlines reform options for realigning agricultural support policies and programs towards competitiveness, climate resilience and food security objectives. Despite considerable challenges, the economy is experiencing a timid recovery from the COVID-19 crisis, which hit the services and extractive sectors hard. GDP growth is estimated to have reached 2.2 percent in 2021, compared to a contraction of 1 percent in 2020.

A rebound in the agriculture and service sectors has helped underpin the incipient recovery, offsetting a contraction in extractives and manufacturing output. Agricultural growth was supported by favorable climatic conditions and the impact of investments in improved seeds, machinery, and irrigation. The gradual lifting of containment measures boosted private consumption, improving the service sector’s performance.

Although the pandemic and other shocks posed significant fiscal pressures, revenue collection has held up, and total expenditures have been contained. The overall fiscal deficit is estimated to have declined from 5.7 percent of GDP in 2020 to 4.5 percent in 2021.

Public debt has continued to rise as the authorities resorted to the expensive domestic market to fufil financing needs. The domestic debt stock reached 22 percent of GDP in 2021, up from 16 percent in 2019.

Growth is expected to accelerate in the medium term, averaging 5.7 percent between 2022 and 2024, mainly reflecting the start of LNG production at the ongoing offshore Coral project in 2022 and expected resumption of investments in the largest (Total-led) LNG project.

Agriculture should maintain a positive performance in the upcoming years supported by continued investments in inputs.

However, downside risks are substantial and could lower growth to 1.9 percent in 2022 (from a projected 3.8 percent). These include rising import prices owing to the Ukraine conflict, further COVID-19 infection waves, and insurgency in the north.

While a prolonged war in Ukraine would weigh on economic recovery, Mozambique will benefit from the broad-based rise in commodity prices. The Ukraine war will likely impact Mozambique through direct and indirect channels, although the country has weak (direct) trade linkages with Russia and Ukraine. The rise in international oil and cereal prices may undermine economic activity and strain the external balance in 2022. Oil and wheat represent 12 and 3 percent of Mozambique’s total imports, respectively.

The authorities have partially passed on the rise in international oil prices to consumers, exacerbating pre-existing inflationary pressures. To tame inflation and stabilize the currency, the Central Bank raised interest rates on March 31, 2022. The Bank of Mozambique was the first central bank globally to increase interest rates in January 2021. A rise in coal and gas prices, combined with higher coal production and the start of LNG production at the Coral offshore project in 2022, will largely offset the increased trade deficit owing to rising import prices.

With the right support, agriculture can be a source of growth, poverty reduction and food security.

Agriculture remains the main economic activity, has vast growth potential, and is critical to ensure food security as approximately 70 percent of the country’s population is engaged in the sector.

Despite its potential, agricultural productivity remains low by regional standards, with Mozambique having one of the lowest cereal yields per hectare. This is largely due to low input access and intensity, weak technology adoption, limited provision of agricultural services, high seasonality in production and climate vulnerability. Given Mozambique’s dependence on climate-sensitive agriculture, increased frequency and intensity of storms, droughts, and floods put further pressure on agricultural income and food security.

Available evidence shows that agricultural growth would decrease poverty and inequality over three times faster than growth in any of the other sectors. Thus, how the sector is supported is key, and must be aligned with the broader goals of sustained growth and poverty reduction. Over the last two decades, Mozambique has seen low and declining public spending on agriculture, falling to only 4 percent of the national budget—less than half of the New Partnership for Africa’s Development (NEPAD) target of 10 percent. As much as 95 percent of total support to the sector involves producer support, largely in the form of market price support (MPS) through trade protection measures. This mainly benefits a small number of commercial producers, while putting up food prices for the majority of agricultural households, and the urban poor.

Targeted and productivity-enhancing agricultural support is associated with improved agricultural trade balance and growth performance. This means increasing support to activities providing general benefits or public goods—such as agricultural innovation (RD and human capital), animal/plant health services, marketing, and rural infrastructure. However, in Mozambique, this type of agricultural support represented only 0.6 percent of agricultural GDP in 2018—the lowest of all countries analyzed.

How to sustain the recovery?

Mozambique needs to diversify its growth model away from excessive dependence on the extractive industry, including through increasing agricultural productivity and creating a vibrant commercial agricultural sector. As it defines its 10-year strategy and investment plan for the sector, Mozambique has an important opportunity to realign agricultural support policies and programs towards competitiveness, climate resilience, and food security objectives.

This requires, among others:

• Shifting agricultural support to public goods and services-rural infrastructure, animal and plant health services, and agricultural research-which can deliver higher economic returns. This shift will require mobilizing financial resources to ensure that it is as neutral as possible to the state budget, while also addressing some of the current structural issues with agriculture public spending (e.g. most sector expenditures are on salaries rather than investments).

• Shifting away from distortive measures towards competitive agricultural policy support. MPS needs to be phased out to allow Mozambique’s farmers to produce based on market signals and to move towards full participation in regional free trade agreements (SADC and the African Continental Free Trade Area—AfCFTA). The gradual reduction of border measures could be accompanied by direct, decoupled, support to farmers who produce protected commodities.

• Reducing implicit taxation of food and increase support to food-insecure households. Mozambican food consumers are funding the bulk of support to the agricultural sector by paying an implicit tax due to border protection measures (MPS). This hits the poorest households hardest. Gradually reducing the MPS would consequently increase the welfare of the poorest.

• Shifting support towards smart subsidies. Producer support could be reformed to help: (i) allow farmers to choose what to produce; (ii) crop production intensification (contrary to area expansion); and (iii) expand access to safe and nutritious food. Climate-smart, nutrition-sensitive agricultural technologies and practices should be integrated into input and technology support incentives to promote productivity growth, build resilience and achieve environmental and nutrition objectives.

This agricultural policy reform is urgent and opportune as it can help to build back better from COVID-19, while also taking advantage of SADC and AfCFTA. However, it needs to be planned and implemented carefully to avoid adverse impacts on the most vulnerable, and be accompanied by growing support for the constant improvement of agricultural practices, the adoption of technology, access to high-quality inputs and financial services, and investment in productive infrastructure (roads, irrigation, etc.).