A matter of money

[Mozambique] Mozal aluminium smelter [2006]
Mozal aluminium smelter (BHP Billiton)

Mozambique has long been favoured by foreign aid and more recently for foreign investment and debt relief. All have contributed to good economic growth figures, but observers say more is needed for a real transition out of poverty.

The African Economic Outlook 2005-2006 report by the Organisation for Economic Co-operation and Development (OECD) said Mozambique has seen impressive economic growth, reaching 7.7 percent in 2005.

Expansion has been driven mainly by foreign-financed "mega-projects" and large aid inflows, but "unemployment and poverty remain critical problems", the report acknowledged.

Greg Binkert, an economist at the World Bank in Mozambique, said such projects tended to be very capital intensive and, once up and running, did not create many jobs, although "they do generate some [positive] spillover effects".

The US$2 billion Mozal aluminium smelter, principally owned by Australia's BHP Billiton, triggered further interest in the country as a destination for foreign direct investment. It was followed by a $1.2 billion Sasol pipeline to deliver natural gas from Mozambique to neighbouring South Africa, and new US$450 million titanium smelter in Moma in northern Tete province.

"Before that, Mozambique was considered a basket case ... seen as high-risk, coming out of civil war, and macroeconomic and government stability were questionable," Binkert commented.

But with 70 percent of the country's population living in rural areas, mega-projects alone are not enough to hit poverty where it hurts. "We [government and the donor community] have to be a lot more creative. Mega-projects help, but more has to go to the [rural] districts for real transformation," Binkert remarked.

Investments in education, agriculture, infrastructure and health projects will be key, according to Mozambique's latest Poverty Reduction Strategy Paper.

One source of funding could be the $1.3 billion debt cancellation under the G8 Gleneagles initiative agreed last year, which will free up $32 million of debt servicing for 2007 and 2008, and contribute $97 million to the national budget in the three years after that. "Instead of debt service, Mozambique can hire teachers and expand education," Binkert said.


Economic growth:

2005: 7.7 percent

2006: 7.9 percent (estimate)

2007: 7.3 percent (estimate)

Stock of Foreign Direct Investment
2004: US$ 4 billion

In 2004, aluminum from Mozal accounted for nearly two-thirds of export revenue.

Incidence of poverty (based on cost of a basket of goods and services):

1996/97: 69 percent

2002/03: 54 percent

Agricultural output growth:

2004: 8.7 percent

2005: 7 percent

People in dire need of food aid:

2005: 800,000

SOURCE: OECD African Economic Outlook 2005/2006

Anna Msutze, Director of the Debt Management Programme at the Macroeconomic and Financial Management Institute of Eastern and Southern Africa, said the amounts were substantial, considering the country's limited ability to make debt service payments but not big at all compared to its requirements. "The funds could be used to build some schools and health centres but the question is: how will teachers and hospital staff be financed after that?"

Mozambique is heavily donor dependent, with aid accounting for half its $2 billion budget, according to Binkert.

Silvester Baeffa, of the Mozambique Debt Group, a coalition of civil society organisations, is worried that debt cancellation might lead to less aid: "The donor community has to repay the debt relief, and that might lead to a reduction of official development aid - it's probably the same money."

Moreover, "progress in debt cancellation is nothing without better aid and better trade - we need a full solution, or Mozambique will fall back into debt", Baeffa said. This week the African Development Bank approved a new $258.1 million loan to the country, covering 2006 to 2009.

The other question is whether the released funds, substantial or not, will actually find their way to the projects that need the money most. With the new focus on the development of rural areas, Mozambique has been going through a process of decentralisation, allowing more authority at district level.

According to Beaffa, "the question now is whether there is sufficient capacity in the different districts to implement the necessary programmes and deal with the financing".

However, Binkert expressed faith that the funds would be used well. "The strategies look good and instruments are in place - Mozambique has a good track record."

This article was produced by IRIN News while it was part of the United Nations Office for the Coordination of Humanitarian Affairs. Please send queries on copyright or liability to the UN. For more information: https://shop.un.org/rights-permissions

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