Gas revenues will come and go in Mozambique – now is the time to think how to use them wisely
Mozambique is still an agriculture-based economy. Huge offshore gas fields have been discovered in the country and plans for gas projects are in the process. However, one day the gas explorations will come to an end. What does this mean for the rest of the economy?
On 28 November, our Inclusive Growth in Mozambique programme held a public forum on ‘Mozambique as a natural gas exporter – lessons from the past experiences’. The event was launched by a presentation from UNU-WIDER’s researcher Alan Roe entitled ‘Extractives as a catalyst for economic transformation: issues from African experiences’.
While following Alan’s presentation, some key ideas stood out, regarding the extractives boom in Mozambique. The first idea is related to a predictable increase in the country’s dependence from the extractive industries. The situation of Mozambique is not a unique reality, rather a global one, involving Africa, on the supply side, and driven by the growth in demand from China, India and Southeast Asian countries.
Nevertheless, it became apparent listening to Alan that Mozambique is one country where this dynamic is expected to take a stronger hold. Alan showed that close to 70% of Mozambique’s exports are already from extractives and the country’s export dependence on extractives increased close to 60% over 1996–2018. This should not be a surprise given the evidence provided, that Mozambique stood in 2012 close to the top 20 countries on per capita value of reserves, and the still steady increase in global demand for non-renewable energy sources.
Growth of dependence on extractives was accompanied with an increase in foreign direct investment (FDI). FDI in Mozambique increased in the recent years more than 30-fold, from US$1,249 million in 2000 to US$39,019 million, bringing the country to the top three position in Africa. That is, just below (but still far away from) Nigeria and South Africa when comparing absolute amounts of FDI.
Management and timing – key for sustaining growth and achieving structural transformation
A word of warning was offered by Alan Roe: even though extractive industries attract FDI and generate exports and a windfall of private and public revenue, a growing extractive industry might not result in sustainable growth nor translate into virtuous structural transformation. Furthermore, recent dynamics suggest that extractives-dependent economies are vulnerable to possible reductions in commodity prices.
A lot stands on how the resources from extractives are managed. When considering macroeconomic and fiscal management, the first question concerns when to use the new resources. Alan’s presentation highlighted that there is a very high level of risk in ‘counting chickens before they hatch’. The uncertainty regarding the lag between promise of returns and the beginning of cash inflows is a great enemy of an ideal macroeconomic management, of which the key word is predictability.
This risk already manifested in Ghana, in the form of a pre-resource curse. The recent hidden-debt crisis in Mozambique shows characteristics much akin to what happened in Ghana, as recent news informed that the Government of Mozambique has already committed future natural resources revenues to the debt service of some of the loans that triggered the crisis.
How to best use the money?
Another set of questions concerns the use of the new resources:
- How much to spend? How much in government consumption? How much in public investment?
- How much to save? How much internally (what does this mean)? How much externally (e.g., a sovereign wealth fund)?
Regarding these questions, it is important to realize that not all investment is done through physical capital. Some is done on immaterial capital: knowledge, education and science and public health are very important examples. Some programmes may call for higher public spending towards gains that are only likely to be seen in one generation onwards — for instance, on education or on an effort to eradicate malaria or HIV.
When thinking about investment in physical capital it is important to realize that Mozambique’s infrastructure needs are very likely to surpass what can be financed using the full amount of fiscal revenues that the country can hope to obtain from its natural resources. This calls for a judicious choice of projects to be supported. Among the key criteria recommended, I would highlight the following:
- The need to undergo proper cost-benefit analysis that incorporate future costs, such as maintenance, in the project finance
- The need for transparency towards Parliament, opposition parties, and civil society
- The need to establish financial, social, and environmental sustainability as paramount selection criteria
- Preference should be given to high-income multiplier and economic diversification projects over projects with less impact up the country’s value chains
The opportunity should not be missed
Mozambique has still a low income-generating, low-productivity, agriculture-based economy, especially if we focus on the non-coal and gas economic activities that will persist after these natural resources’ exploration becomes economically non-viable (due to resource exhaustion, market saturation, or both). All opportunities to strengthen the economic potential of the Mozambican economy, via investments in physical and, even more so, human capital should be grasped. The expected revenues from the natural resources present themselves as one such opportunity, a unique and precious one.
Rushing into untimely, non-strategic and non-transparent ventures would rob the Mozambican people, present and future, of the possibilities that this opportunity can open. One day, still in a not totally known future, these revenues will arrive. One day, as surely as they will come, they will be gone. It is up to Mozambican decision makers to make the best of the opportunity, towards inclusive growth in Mozambique.
The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.
Research Brief | Extractives and economic diversification in Mozambique
Research Brief | Potential benefits and pitfalls of extractives in Mozambique
Blog | What should Mozambique do with the revenue from natural gas projects? (Part I)
Blog | What should Mozambique do with the revenue from natural gas projects? (Part II)
Blog | What should Mozambique do with the revenue from natural gas projects? (Part III)