Mozambique powering itself out of the global downturn – PLMJ

Despite feelling the effects of the global financial crisis, Mozambique continues to focus on expanding its natural resources and particularly its energy sector

Endowed with rich, abundant and extensive natural resources, Mozambique’s present day economy is one of huge potential, says Tiago Mendonça de Castro, who leads the Mozambique practice at PLMJ in Lisbon and in Maputo.

‘The government has embarked on a series of reforms designed to stabilise and grow the country’s economy. These steps, combined with donor assistance and political stability, have led to dramatic improvements in the country’s growth rate. Mozambique has been one of Southern Africa’s fastest growing economies over the past decade.’

Inflation has been reduced to single digits while fiscal reforms, including the introduction of a value-added tax and reform of the customs service, have also improved the government’s revenue collection abilities.

Mozambique has though felt the effects of global financial crisis, he says. ‘Much of the country’s economic development has been driven by significant public infrastructure projects, ports, airports, roads and power plants, and despite efforts to maintain and develop projects the truth is that a number are being delayed due to the lack of financing.’

The Government is intensifying its efforts to continue the progress achieved in the last decade. The Mozambique economy remains however dominated by agriculture, which contributes around a quarter of GDP, says Mendonça de Castro, but which is seeing diversification into cereals, rice and maize, as well as the emergence of agro-business (notably sugar cane) and biodiesel production.

The countries natural resources include hydroelectric energy, gas, coal, gold, salt, graphite and bauxite – the opening of the US$1.3bn Mozal aluminium smelter, the country’s largest foreign investment project to date, has also increased export earnings.

‘What must be remembered is that in Mozambique the land belongs to the state and cannot be sold, transferred, mortgaged or charged. A Right to Use and Profit from the Land (Direito de Uso e Aproveitamento da Terra – DUAT) can however be granted to foreign entities if they have an investment project approved under the relevant legislation, and are incorporated and registered in Mozambique,’ says Mendonça de Castro.

Among the country’s fastest growing industries are food and beverages, chemical manufacturing and aluminium production, which contribute 35% of GDP, while services now account for almost 40% of GDP. In addition, there remains much hope around sectors like energy, infrastructure and tourism.

‘Mozambique has immense tourism potential. Its 2,000 km of coast abound in beaches and diving areas while inland there is a wealth of parks and nature reserves. Indeed, the sector has been increasing considerably and attracting some of the biggest tourism developers and groups,’ says Mendonça de Castro.

Likewise investment in energy production has also been substantial in recent years. In November 2007, the Government completed the historic buyback of the 2,075 MW Cahora Bassa Hydroelectric Dam.

‘The success of the transaction raised Mozambique’s profile as an attractive destination for foreign investment. But it also demonstrates the benefits that can be derived from further development of its electricity generation potential for domestic and regional markets,’ he says.

The Government is now focusing on developing the country’s transmission grid, which is interconnected with neighbouring Zimbabwe, South Africa and Swaziland, and electricity exports and has identified four new regional electricity generation ‘mega-projects’ with a total generating capacity of almost 7,000 MW.

‘These potential projects, located in Tete Province, would require the creation of an entire new transmission system for connection to load centres in Mozambique and abroad.’

The greatest successes in Mozambique business sectors continue to result however from alliances between foreign and national investors – although it is not mandatory to involve a local partner – and there is strong local Government interest in attracting investors through the granting of incentives, says Mendonça de Castro.

‘Investors still look to Mozambique as a risky market and consequently expect higher returns than in other comparable countries. However, the country’s political and economic stability has helped to create a confident environment for doing business and the potential returns are worth the risk.’