May 27, 2019

Republic of Mozambique

Agrarian Sector Transformation: a Strategy for Expanding the Role of The

Private Sector

May 2019

Agriculture Global Practice

Africa Region

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Standard Disclaimer

This Draft Report is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this Interim Report do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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Acknowledgments

This Report was produced by a team from the World Bank Group led by Norman Piccioni (Senior Agriculture Economist), Aniceto Bila (Senior Agriculture Specialist) and Pedro Arlindo (Agriculture Economist). The technical team was composed of Ulrich Lachler (consultant) who wrote the main report based on background papers from Ventura Mfume, Dato Vilissa, Carlos Costa, Benedito Cunguara, Calisto Bias which were summarized and further elaborated by Fion de Vletter (consultant). Additional support was provided by Richard Anson (lead consultant), Joao Mutondo (Associate Professor of Agricultural Economics, Universidade Eduardo Mondlane); Helder Zavale (Senior Lecturer of Agricultural Economics, Universidade Eduardo Mondlane); and Ms. Gaby Mandlate (Junior Lecturer of Agricultural Economics, Universidade Eduardo Mondlane).

Mark Austin (Program Leader, EACMM), and Holger Kray (Lead Agricultural Economist, GFA13) contributed useful insights as peer reviewers; while – Mark Lundell (Country Director, AFCS2), Raymond Bordeaux (Program Leader) provided additional guidance at various stages of the report’s preparation. Dina Umali-Deininger (Practice Manager) provided overall oversight for the work. Federica Ricaldi (Economist, GPSJ), Shireen Mhadi (Country Economist), Anna Carlota Massingue (Research Analyst, GMTA4), Zayra Mercado (Senior Energy Specialist), Andre Aquino (Senior NRM Specialist), Anna Corsi (Senior Land Administration Specialist), Joao Moura (NRM Specialist), Isabel Ramos (Consultant, Senior Climate Change Specialist) and Gabriella Morandi (Consultant, Communications Specialist) provided comments and revised the output. Marina Mwanga (Team Assistant) provided administrative and logistical support. MINERVA Printing and John Barnes, editor, prepared the printed materials.

The team would like to thank the Ministry of Agriculture and Food Security staff, (MASA), in particular the FDA Director Eusébio Tumuitikile and Eulália Macome, and Júlio Costa from FNDS, and from the Ministry of Industry and Trade/MIC, in particular, Nicolau Sululo (Director) and Ascencao Machel, from DASP, for their collaboration and useful comments and contributions. The team would like to thank the former director of DPCI Ilidio Massinga for his leadership during the conceptual stage, and the directors of MASA/DPCI, Delfim Valissa, and MITADER/Rural Development, Olegário Banze, for their support during completion; the Ministry of Economy and Finance (MEF), Ministry of Land, Environment and Rural Development (MITADER), Ministry of Industry and Trade (MIC); and the County local Governments for excellent collaboration, including organization of the various missions and meetings, and provision of the information and inputs requested.

Special appreciation is expressed to: (i) the Department of International Development of the United Kingdom (DFID), for providing generous funding support and solid technical advice to carrying out this study, together with its complementary study “Mozambique Agriculture Public Expenditure Review”, under the leadership of Shahnila Azher (Team Leader), Catriona Cluna, and Sérgio Dista; (ii) The Food and Agriculture Organization of the UN (FAO) for making available valuable human resources and technical backstopping, in particular Alberta Mascaretti (Head of the Investment Center) and Olman Serrano, FAO representative in Mozambique); and (iii) The Alliance for a Green Revolution in Africa (AGRA), through his representative Paolo Mole, for his collaboration and for providing useful insights.

https://www.gatesfoundation.org/How-We-Work/Resources/Grantee-Profiles/Grantee-Profile-Alliance-for-a-Green-Revolution-in-Africa-AGRAhttps://www.gatesfoundation.org/How-We-Work/Resources/Grantee-Profiles/Grantee-Profile-Alliance-for-a-Green-Revolution-in-Africa-AGRA

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Currency Equivalent

Exchange rate effective as of May 24, 2019

Currency unit (MTZ)

US$1.00 = MTZ62.4

Acronyms and Abbreviations

ADVZ Agência de Desenvolvimento do Vale do Zambeze

AfDB African Development Bank

AgDevCo Global Agricultural Development Company

AGRA Alliance for a Green Revolution in Africa

AMSCO African Management Services Company

ANE National Road Administration Authority

APIEX Agência de Importação e Exportação

BAGC CF Beira Agricultural Growth Corridor

BAU One-stop window for license and registration applications

BdM Banco de Moçambique (Central Bank)

BMM Bolsa de Mercadorias de Moçambique

BNI State-owned National Investment Bank

BTM Banco Terra Moçambique

CAP Censo Agro-pecuário (Agricultural Census)

CCSA Coordination Committee for the Agricultural Sector

CEPAGRI Commercial Agriculture Promotion Center

CEPAQ State-owned fish experimental station

CFMP Government Medium-Term Fiscal Framework

CGIAR Consultative Group on International Agricultural Research

CPI Investment Promotion Agency

CSO Civil Society Organization

CSR Comprehensive Seed Regulation

CTA Confederation of Trade Associations

DANIDA Danish International Development Agency

DASP Directorate of Support for Private Sector Development

DCA-SIDA Development Cooperation Agency – Swedish International Development Agency

DFID UK Department for International Development

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DINAS National Directorate of Agriculture and Forestry

DUAT Land tenure right

EBA Enabling the Business of Agriculture

EDM Electric utility company

EGS Early Generation Seeds

EIA Environmental Impact Assessment

EU European Union

FAO United Nations Food and Agriculture Organization

FARE Fund for Economic Rehabilitation

FDI Foreign Direct Investment

FPC Central Bank's benchmark interest rate

FRELIMO Front for the Liberation of Mozambique

GAZEDA Gabinete de Apoio as Zonas Especiais de Desenvolvimento Acelerado

GDP Gross Domestic Product

GiZ German International Cooperation Agency

GOM Government of Mozambique

IAI Integrated Agriculture Survey

ICT Information, Communications and Technology

IFAD International Fund for Agricultural Development

IFDC Agricultural Development Center

IGEPE Instituto de Gestão das Participações do Estado

IIAM Institute for Agricultural Research

IMF International Monetary Fund

INCAJU State-owned Cashew National Institute

INNOQ Instituto Nacional de Normalização e Qualidade

IPEX Instituto para a Promoção de Exportações

IRPC Corporate Income Tax

ISPC Simplified Income Tax for Small Producers

IVA Value-Added Tax (same as VAT)

M&E Monitoring and Evaluation

MAAP Mozambique Agricultural Aggregator Pilot

MASA Ministry of Agriculture and Food Security

MBS private bank

MEF Ministry of Economics and Finance

MFI Micro Finance Institutions

MIC Ministry of Industry and Trade

MIS Market Information System

MISAU Ministry of Health

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MITADER Ministry of Land, Environment and Rural Development

MMAI Ministry of Sea, Interior Waters and Fisheries

MOPHRH Ministry of Public Works, Housing and Water Resources

MOzBIO Conservation area’s project for biodiversity and development MOzFIP Mozambique Forest Investment Project

NGO Non-Governmental Association

Norfund Norwegian Private Sector Development Agency

O&G Oil and Gas sector

ODA Overseas Development Assistance

PAMAN Action Plan for the Improvement of the Business Climate

PEDSA Strategic Plan for Agricultural Development

PES Economic and Social Plan

PFCS Program for Strengthening the Seed Chain

PIGA Partnership for Investment and Growth in Africa

PNISA Agrarian Sector Investment Program

PORTUCEL Refers to the largest forestry project in Mozambique

PPP Public-Private Partnerships

PQG Five-year Government Plan

PROAGRI2 Agricultural Sector Public Expenditure Program Project PRONEA National Agricultural Extension Program

PROSAVANA Triangular Cooperation Program for Agr. Development of the Tropical Savannah

PROSUL Pro-Poor Value Chain Development Project in the Maputo and Limpopo Corridors

PSWG Private Sector Working Group

RENAMO Mozambican National Resistance

RFSP Rural Finance Support Program

SADC Southern Africa Development Community

SiGit Land Management Information System

SME Small and Medium Sized Business

SSA Sub-Saharan Africa

TIA Trabalho de Inquérito Agrícola (National Agricultural Survey)

UNDP United Nations Development Programme

USAID U.S. Agency for International Development

UTRE Unidade de Transformação e Reabilitação da Economia

VAT Value-Added Tax (same as IVA)

WHO World Health Organization

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Contents

Executive Summary ................................................................... viii

1. Introduction ..................................................................... 1

2. Country Context and Macroeconomic Overview ....................... 2

2.1 Political Context ........................................................................................... 2

2.2 Medium-Term Macro-Economic Outlook ...................................................... 2

2.3 Poverty Indicators .......................................................................................... 4

2.4 Overall Development Challenge ..................................................................... 4

3. Overview of The Agrarian Sector .......................................... 6

3.1 Sector Performance ........................................................................................ 6

3.2 CAADP Process: Commitment and Performance ........................................... 8

3.3 Sector Profile ................................................................................................. 9

3.4 Institutional Structure, Arrangements and Roles ........................................... 17

4. Main Constraints Facing the Private Sector ............................. 22

4.1 Overall Business Environment ..................................................................... 22

4.2 Sector-Specific Constraints to Agricultural Business ...................................... 29

4.3 Facilitating Agricultural Value Chains ......................................................... 48

4.4 Strengthening Institutional Coordination Arrangements ............................... 51

5. Strategy & Roadmap for Expanding Role of the Private Sector…...53

5.1 Government Strategy for Country and Agrarian Sector Transformation ....... 53

5.2 Strategy for Expanding Role of Private Sector ............................................. 55

5.3 A Roadmap for Policy Makers ……………………………………………………………………….64

Annex 1: Action Plan: Summary of Strategic Actions ……………………..66

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Executive Summary

Mozambique’s policymakers are faced with the challenge of restoring faster, more inclusive growth. In view of its high debt burden and limited management capacity, however, the public sector is not in a position to generate such growth directly. Furthermore, the development model that Mozambique has followed since independence – characterized by a high dependence on capital-intensive projects in the extractive minerals sector and low-productivity subsistence agriculture – is increasingly unable to deliver on its poverty reduction promise. It needs to be reoriented to bring about a more diverse and competitive economy, while strengthening the key drivers of inclusion, such as improved access to quality education and health service delivery.

Mozambique’s economic conditions in 2019 are likely to be affected by the recent devastation caused by tropical cyclones Idai and Kenneth, which costs are expected to be higher than those experienced in the 2000 floods (which totaled at 9 percent of GDP). In the medium term, growth is expected to recuperate gradually towards 4 percent by 2021 and may advance at a faster rate with progress in the development of Mozambique’s large liquified natural gas (LNG) projects. This, along with a more stable price scenario, should support conditions for further monetary policy easing and could therefore provide much needed stimulus for investment in the non-LNG economy in the medium term. Despite this, the impact on poverty will be negligible with poverty levels projected to decline to 58.5 percent by 2021. As Mozambique develops its LNG projects, the current account deficit is set to treble in the next three years and likely to reach over 60 percent of GDP. This is anchored by the expected rise in imports, particularly of capital goods, heavy machinery, and specialized services linked to LNG project development. LNG development, as is the case for other megaprojects, is supported by foreign direct investment. The fiscal outlook remains fragile as imminent spending pressures are expected to increase government’s financing needs. Electoral spending and the implementation of decentralization reforms are expected to create additional spending pressures in 2019, pushing the primary fiscal deficit closer to 1.5 percent of GDP. Moreover, the government’s elevated level of domestic borrowing during a time of high interest rates means that Mozambique’s will be required to cover higher interest costs for the years to come (an estimated 3 percent of GDP) (Source Mozambique Poverty Outlook SM 2019).

The private sector needs to be enabled to play a much larger role in fostering growth and deepening the development process. Given the tight budgetary framework, the government needs to rely primarily on non-monetary incentives to induce greater private sector engagement, particularly in the agrarian sector, where Mozambique exhibits the greatest room for improvement. In particular, the success in achieving faster growth and poverty reduction will hinge on the transformation of the agrarian sector from a stagnant repository of idle labor into a dynamic engine of growth.

The challenge addressed in this report is how to encourage the private sector to expand its role in transforming Mozambique’s agrarian sector into a more productive and competitive sector.

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The transformation of Mozambique’s agrarian sector is so important for several reasons: to begin with, it provides employment to around 70 percent of the total labor force. These rural workers also tend to be among the poorest members of society, largely because of the low productivity prevailing in the agricultural sector, which is dominated by smallholder farmers. Improvements in agricultural productivity, therefore, immediately translate into higher incomes for the poor. Not surprisingly, poverty reduction exhibits the highest elasticity in relation to agricultural sector growth compared to growth in any other sector. At the same time, Agriculture plays a critical role in ensuring food security. That is, the structural transition from agricultural employment to employment in industry and services, which characterizes the development process in all countries, would not be possible in the absence of rising agricultural productivity rates without endangering food security.

Mozambique can count on several comparative advantages in developing its agrarian sector. They include a great diversity of land and lots of it: Mozambique is blessed with ten agro-ecological zones with diverse soil and climate characteristics offering scope for cultivating a wide range of crops, and only 15 percent of the arable land is currently being utilized. Also, there are ample supplies of water and a sizeable, though largely uneducated, rural labor force. Furthermore, Mozambique is strategically well located from a trade logistics perspective.

There are also a number of constraints, however, that are holding back the private sector from expanding its activities and engagement in Mozambique’s agricultural development. Other than the overriding concerns about macroeconomic volatility risk, the most important obstacles have been identified as: (i) unclear and inconsistent interpretation of rules of doing business and their arbitrary enforcement, (ii) the lack of access to agricultural inputs and improved technology, (iii) poor rural infrastructure that inhibits value chain competitiveness, (iv) lack of land tenure security, (v) lack of access to credit, and (vi) a fragmentation of sector policies and activities for lack of adequate coordination among all major stakeholders. In addition, there are significant under-utilized state-owned assets that could be put to work under a better incentive structure and that currently constitute a wasted opportunity. The World Bank Doing Business Report 2018 indicates that Mozambique ranks 135 out of 190 countries (see Figure below) in the ease of Doing Business, hence reflecting some difficulties and constraints described in this report.

http://www.worldbank.org/content/dam/doingBusiness/country/m/mozambique/MOZ.pdfhttp://www.worldbank.org/content/dam/doingBusiness/country/m/mozambique/MOZ.pdf

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This report proposes a Strategy to Expand the Role of the Private Sector in transforming the Agrarian sector (SERPS) in Mozambique with a set of outcome-oriented strategic actions designed to remove or mitigate the impact of each of the main constraints on greater private sector involvement in the agrarian sector, and to take better advantage of unexploited opportunities. This strategy is organized around the pursuit of seven strategic outcomes related to the removal of the constraints just mentioned. These are listed next, together with a summary of the strategic actions proposed to achieve those outcomes.

STRATEGIC OUTCOME 1: An improved business environment through clearer regulations and rules, and their consistent and transparent obligation.

This outcome addresses a concern that extends beyond the agrarian sector. To achieve this outcome, the SERPS proposes the strengthening the existing Public Private Sector Dialogue Forum to review/update relevant laws and regulations (commercial, labor, customs, environmental) that impede competitiveness or undermine profitability, and to either update or remove them. Furthermore, the SERPS also proposes the creation of an Office of the Private Sector Ombudsman, and/or strengthening the existing Justice Provider’s role, to review private sector complaints of unfair or arbitrary application of rules. The creation/strengthening of an easily accessible bilingual e-platform to answer frequently asked question about taxes, regulations and procedures would complement these efforts.

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STRATEGIC OUTCOME 2: Increased smallholder incomes through wider adoption of appropriate technologies and inclusive aggregator models.

The agricultural sector is dominated by smallholders that exhibit very low productivity levels, which explains the widespread rural poverty observed in Mozambique. The reason their productivity levels are so low is the poor access to appropriate technologies and to inputs (e.g., fertilizers, improved seeds). To address this shortcoming, the SERPS proposes upgrading the provision of agricultural extension services with more staff and a Master Plan developed with stakeholders to tailor interventions with greater attention to regional patterns and conditions, and to coordinate the adoption of particular technologies with the use of certain other inputs, such as fertilizers. Another key measure proposed in the SERPS is to promote the expansion of aggregation systems, which would allow smallholders to take advantage of economies of scale available to larger producers or processors, as well as access to fertilizers, pesticides and seeds coordinated through the aggregator firm. For this to work successfully, however, stricter legal sanctions against “side-selling” of produce by contracted out-growers are needed, as well as a simpler tax registration system for smallholders so that the Value-Added Tax can function properly.

STRATEGIC OUTCOME 3: stronger value chain competitiveness through an improved and sustainable incentive structure, better linkages to other sectors and better rural infrastructure.

The current system of tariffs, taxes, quotas and subsidies makes it difficult to ascertain how much protection different producers and consumers are receiving in Mozambique. This raises the risk that uncompetitive activities are being promoted at the expense of consumers, or that potentially competitive activities are being discriminated against. To reduce risk of such distortions, the SERPS proposes a thorough analysis of the current incentive structure facing Mozambican producers (both upstream and downstream) in the main domestic and international value chains, and to prepare a tax and trade reform based on the findings from this analysis to clarify and limit the levels of protection offered to different economic activities. The SERPS also proposes prioritizing the rehabilitation of stretches of highway EN1 and certain rural roads in urgent need of repair, as well as the improvement of exporting and storage facilities. To strengthen linkages between agriculture and the rapidly growing mining sectors, the SERPS proposes carrying out a study to assess the competitive advantage of the most efficient international food producers that are currently supplying the Gas and Oil sector’s consumption requirements in Mozambique, and on that basis consider preparing a package of time-bound incentives based on infant industry principles designed to induce the substitution of imports by domestic food production.

STRATEGIC OUTCOME 4: Improved land tenure security and expanded land access and utilization

The lack of clarity about who legally occupies and uses the land, including land underutilization, remains one of the main factors discouraging new investments in Mozambique’s agrarian sector. Smallholders are most affected by the absence of land tenure rights (DUATs). To address this problem, the SERPS recommends an accelerated regularization of DUATs under the

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government’s ongoing Terra Segura program and greater NGO participation, together with improvements in the Land Management Information System. To improve land utilization, the SERPS also proposes a series of steps to revise the Land Law with provisions to tax or expropriate idle lands. In parallel, it would also be important to prepare a White Paper for government approval that establishes clear and transparent procedures for the compensation, dislocation and integration of communities occupying lands scheduled for development.

STRATEGIC OUTCOME 5: Expanded access to affordable, inclusive and sustainable finance, linked to competitive value chains.

Almost all surveys relating to Mozambique’s business environment place access to finance near the top of the list of main constraints to doing business in Mozambique. To promote the development of financial markets attuned to the particular characteristics and risks of the agrarian sector, the SERPS proposes a review and assessment of the numerous experiences with non-conventional financial instruments that have been tried out, both domestically and abroad, and form a short list of those that might be appropriate for Mozambique for further consideration. Also, on a more immediate basis, the SERPS recommends considering strengthening the capacity of the state-owned National Investment Bank (BNI) to manage the financial products supported by IFAD, World Bank and other donors, and eventually serve as a rural development bank for the country.

STRATEGIC OUTCOME 6: Greater private sector participation through sale/lease of under-utilized state-owned assets or PPPs.

The Mozambican government owns a considerable stock of agri-business facilities for which it has neither the managerial capacity nor the financial resources to operate efficiently. These assets represent a great opportunity for attracting greater private sector investment into the agrarian sector. Accordingly, the SERPS proposes that these assets be sold, leased or integrated into PPPs as quickly as possible before they deteriorate further and are no longer attractive. To sell or lease such assets, however, the government must first define a policy for disposing of unused public assets. Two other prior steps meant to facilitate the transfer of assets are the convening of a multi-sectoral commission to prepare and inventory of unused state-owned assets, including an assessment of their condition and value, and the development of a template for PPP arrangements and contracts, which will facilitate the transfer process.

STRATEGIC OUTCOME 7: Strengthened institutional arrangements for ensuring effective and timely results-focused coordination of key stakeholders.

Most agrarian sector assessments worldwide have highlighted the importance of strong, multi-stakeholder coordination arrangements and processes for transforming the agrarian sector into an inclusive, competitive and modern wealth-generating sector. Toward that purpose, the SERPS proposes to support the strengthening and effectiveness of the Public Private Sector Dialogue Platform and its supporting mechanisms, to be complemented by a reactivated multi-stakeholder, Coordinating Committee for the Agrarian Sector, CCSA.

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Introduction

The Government of Mozambique is seeking to achieve its strategic objectives and targets for socio-economic and political development by intensifying the implementation of its five-year government plan (Plano Quinquenal de Governo/PQG: 2015-2019). It is also taking preparatory steps for the next phase of its PQG, which is to coincide with the new government period following the national elections taking place later in 2019. While the Government has a stated policy of promoting an expanded role for the private sector in all sectors of the economy, it has not yet articulated a comprehensive and integrated private sector strategy for the country overall, nor for any of the major sectors/subsectors, all of which should be derived from and contributing to the PQG. The Government therefore has been looking to bring in international experience and expertise to help formulate, implement and track a coherent private sector strategy that is attuned to the evolving institutional roles and arrangements that are influencing the direction and pace of private sector development, both domestically and abroad. Given the dominant role of the agrarian sector in Mozambique’s economy, and in providing work for the majority of its labor force (about 80 percent), any efforts to expand the role of the private sector are likely to have their greatest impact when applied to Mozambique’s agrarian sector, which is the focus of this report.

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Country Context and Macroeconomic Overview

5 2.1 Political Context

The Peace Accords of 1992 brought an end to a protracted civil war (of 16 years), but political tensions continue to simmer with sporadic armed conflict breaking out between members of the ruling Front for the Liberation of Mozambique (FRELIMO) and the former rebel group represented by the Mozambican National Resistance (RENAMO) – the country’s two main political parties. Their historical relationship has been rocky, posing an important governance challenge. Ongoing talks to stabilize the situation include efforts to consolidate peace by integrating RENAMO militia members into the national army. The 2018 municipal elections confirmed FRELIMO’s political dominance, although RENAMO gained ground by winning eight municipalities out of 58, mainly at the expense of third parties. Meanwhile, the government is grappling with a new, low-level so-called Islamic insurgency in parts of the gas-rich province of Cabo-Delgado that poses a risk of spreading to neighboring provinces.

Additionally, Mozambique faces significant governance challenges. A “hidden debt” scandal erupted in 2016, revealing major weaknesses in public sector management, transparency and accountability, and also reflecting (as reported by Transparency International) significant and growing corruption in the public sector. The investigation of this scandal, which involved the theft of approximately 15 percent of GDP, is still underway and will be important in determining how quickly investor and donor confidence is restored. Also, Mozambique’s government is currently rated as “authoritarian” according to the most recent Democracy Index of the Economist Intelligence Unit, following a sharp drop in the ratings of the country’s electoral process due to “irregularities and violence against members of the opposition during and after the municipal elections held in October 2018.” The upcoming elections scheduled for October 2019, offer an opportunity to improve these ratings, as provincial governors are to be elected directly for the first time, marking a significant departure from previous practice where provincial governors have been appointed at the central level as members of the executive branch.

2.2 Medium-Term Macro-Economic Outlook

During the period 2011 to 2015, Mozambique’s gross domestic product (GDP) growth rates have been among the highest in Sub-Saharan Africa (SSA), averaging about 7% per year. In the subsequent years, this scenario changed downwards, mainly due to economic crisis and the unsustainable debt. The country also experienced rapid inflation rates, balance of payments imbalance, decreased direct foreign investment levels. Specifically, debt levels are unsustainably high. The external debt declined from 104 percent of GDP at end-2016 to an estimated 85 percent by end-2017, mainly due to the appreciation of the Metical. However, the central government’s domestic debt level increased as the government was unable to contain its fiscal deficits. Furthermore, contingent liabilities and debt servicing costs of the public sector have continued to rise as state-owned enterprises experience operational and financial

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difficulties. Following the hidden debt scandal, the government declared itself unable to service the public debt in 2017 and continues to be in default on several loans, limiting the country’s access to international capital markets. The slowing and erratic macro-economic performance have affected adversely Government revenues and fiscal imbalance, resulting in decreased external assistance and public expenditures for all sectors and functions of Government.

However, Mozambique has become a fairly open economy over the last decade, with a trade ratio of well over 100 percent. This reflects the rapid growth of imports triggered by trade liberalizing reforms and expanding Foreign Direct Investment (FDI) flows, combined with unusually high levels of net official development assistance (ODA). FDI grew to almost 20 percent of GDP in 2017 and is largely concentrated in so-called “mega-projects” associated with the extractive sector, while foreign ODA amounted to 14 percent of GDP. The country’s openness has contributed to overall economic growth, but it also rendered the economy vulnerable to commodity price fluctuations and potentially susceptible to Dutch Disease. The expected performance of international trade might help to improve the economy in upcoming years and slight growth recovery is expected in 2019, with projections of around 4 percent and possibly rising in the medium or long term if major gas production investments materialize.

The contribution of agriculture to the economy did not change significantly as it remained stable at about 23% of GDP during the period from 2013 to 2017 (

Table 2.1). Apart from services’ sector, which is composed of several economic

activities/subsectors, agriculture is the main contributor to the GDP in the country. The relative importance of agricultural sector is even larger when considering other related sectors (industry, manufacturing and services), which are directly driven by agricultural sector as well as by the fact that about 80% of the total labor force in the country is employed in agricultural related activities.

Sector 2013 2014 2015 2016 2017

Agriculture 24 23 23 23 21

Manufacturing 9 9 9 9 9

Industry 8 10 11 11 16

Services 59 58 57 57 54

Source: INE (2019)

Sector 2013 2014 2015 2016 2017

Agriculture 24 23 23 23 21

Manufacturing 9 9 9 9 9

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Table 2.1 Structure of Economy and Contribution of Sectors to GDP (20 13 – 2017)

Despite the erratic economic performance, Mozambique has great economic potential. It is endowed with ample arable land, water, energy, as well as mineral resources and newly discovered natural gas deposits. It also has a sizable, though largely unschooled, pool of labor, with about 80 percent of its population of 27 million (2015) living and working in rural areas or working in agricultural related activities. Mozambique is strategically located, with a long, Indian Ocean coastline of 2,500 kilometers that faces east to Madagascar and counts on three deep-sea ports namely Nacala, Beira and Maputo. Four of the six countries its borders are landlocked, and hence dependent on Mozambique as a conduit to global markets. It has close and growing ties to South Africa, the region’s largest economic engine. These socioeconomic potentials can be used to expand the role and performance of private sector in agrarian sector.

2.3 Poverty Indicators

With a per-capita income of US$420 (Atlas method) in 2017, Mozambique is still one of the poorest countries in the world – ranking 187 out of 192 countries (2018). With a population of about 27 million people, 46.1 % of the population were poor in 2015. About 8 out of 10 persons residing in rural areas are poor. Poverty, including stunting, remains much higher in rural areas (53.1%) compared to urban areas (40.7%), and poverty is becoming geographically concentrated in some provinces. Poverty levels are significantly larger in the Northern region. In the light of these poverty levels, the Government of Mozambique, with significant financial and technical support from development partners, has carried out significant efforts towards reduction of poverty.

The pace of poverty reduction appears to have been slowing, however, and income inequality has been increasing. This is largely explained by the very low responsiveness of poverty reduction to economic growth in Mozambique. In sub-Saharan Africa, a 1 percent increase in GDP per capita is associated on average with a 0.5 percent drop in the poverty rate. Yet in Mozambique, a 1 percent increase in GDP is associated with a decline of just 0.26 percent in the national poverty rate. This low response in poverty reduction reflects the structure of economic growth in Mozambique, which has been mainly driven by capital intensive investments in the mining and energy sector, which employs very few people, while the sector employing the most people, agriculture, has attracted limited investment and exhibits poor productivity growth.

2.4 Overall Development Challenge

The overall challenge facing Mozambique’s policy makers is to restore economic growth and step up poverty reduction. Considering the high public debt burden, the public sector is not in a

Industry 8 10 11 11 16

Services 59 58 57 57 54

Source: INE (2019)

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position to serve as the main engine of growth. Rather, it is necessary that the private sector, which is currently struggling, be allowed and appropriately “enabled” to play a much larger role in fostering growth and deepening the development process. This will require sound macroeconomic policies, market-oriented structural reforms and the restoration of investor confidence. The immediate task of maintaining macroeconomic stability is particularly challenging in view of the limited public sector management capacity, the country’s high exposure to commodity price fluctuations, and the currently delicate political balance in the run-up to the general elections. The risk of renewed macroeconomic instability, especially exchange rate volatility, is arguably the single most important obstacle to a more vigorous participation of foreign investors in Mozambique’s agribusiness sector. Meanwhile, reestablishing investor confidence will also require visible improvements in governance and increased transparency, especially in handling the hidden debt investigation.

The major development challenge over the medium term is to diversify the economy away from its current dependence on capital-intensive projects in the extractible sector and low-productivity subsistence agriculture toward a more diverse and competitive economy, while strengthening the key drivers of inclusion, such as improved access to quality education and health service delivery. As noted above, Mozambique’s current development model is becoming increasingly ineffective in achieving poverty reduction. The reason is that it has only been able to generate few jobs in the fast-growing sectors and hardly increased the productivity of jobs where most people are concentrated. To have a greater impact on poverty reduction, more and better jobs need to be generated in the sectors where most people will be employed in the foreseeable future, and those involve the agrarian sector. Meeting the two-fold challenge of restoring faster, more inclusive economic growth and accelerating poverty reduction, therefore will chiefly depend on how well the country succeeds in expanding the role of the private sector in modernizing Mozambique’s agrarian sector.

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Overview of The Agrarian Sector

3.1 Sector Performance

Agriculture has been a lagging sector in Mozambique since the mid-1990s. While GDP growth took off after 1995, Agriculture remained comparatively stagnant; Figure 3.1. The most important driver of GDP growth in the last decade has been the mining sector, which is very capital intensive and offers relatively few employment opportunities.

Source: World Bank, World Development Indicators

Most Mozambicans’ incomes depend on the earnings generated in the Agriculture sector. Even though Agricultural output, including fishing and forestry, only represents around 21 percent of total GDP (2017), the sector employs over two-thirds of the entire labor force; Table 3.1. This means that Agriculture will continue to play a critically important role in determining the speed and direction of Mozambique’s economic and social development in the foreseeable future.

Productivity in Agriculture is extremely low. The structural imbalance between output shares and employment shares indicates that Agriculture exhibits the lowest labor productivity rates among the major sectors. While the average output generated per worker across all sectors was $1,477 in 2014, the average output generated in Agriculture only reached one-third of that amount ($530); Figure 3.2. This disparity is even more pronounced when compared with the most productive sector (Industry), which exhibits a labor productivity rate that is 10 times greater than in Agriculture.

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Table 3.1: Mozambique: Structural Evolution of the Economy; by Sector

1996 2003 2009 2014 2017

Sector Shares of GDP

Agriculture 38.1% 31.4% 30.5% 25.5% 21.0%

Industry 10.2% 21.1% 19.7% 18.8% 25.0%

Services 51.8% 47.7% 49.8% 55.7% 54.0%

Total 100% 100% 100% 100% 100%

1997 2003 2009 2014 NA

Sector Shares of Total Employment

Agriculture 86.6% 80.5% 80.4% 71.0%

Industry 4.4% 3.4% 4.7% 4.9%

Services 9.0% 16.1% 15.0% 24.0%

Total 100% 100% 100% 100%

Source: World Bank calculations using Jobs CCSA data. Figures for 2017 are from WB, World Development Indicators.

Poverty is most responsive to Agriculture sector growth. As noted previously, the overall GDP growth elasticity of poverty reduction in Mozambique is only -0.26, but it is -2.6 when the elasticity is related to Agriculture growth. Given the low productivity levels in Agriculture, most people’s earnings in that sector are commensurately low, and since it encompasses the largest

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share of the population, it is not surprising that most of the poor are to be found in rural areas, engaged in Agricultural activities.1

While the overall national poverty headcount ratio in 2014-15 was 48 percent, the rural poverty ratio was 56 percent. This suggests that even modest improvements in agricultural productivity would have a major impact on poverty reduction.

3.2 CAADP Process: Commitment and Performance

African leaders, through the African Union (AU) and its technical arm, NEPAD, have developed and implemented the Comprehensive African Agricultural Development Program (CAADP) framework and agenda to help accelerate agricultural sector growth and reduce poverty. African Heads of State have affirmed their commitment to meet common development strategic targets as reflected in the MAPUTO Declaration (2003) and reaffirmed in the MALABO Declaration (2014). Mozambique has demonstrated consistent commitment to complying with and carrying out the CAADP agenda and agreed targets, reflected in the formulation and implementation of PEDSA and PNISA. However, the performance has been erratic for similar reasons outlined above, and further detailed in the independent assessment of Mozambique’s PNISA.2 This assessment also highlighted the inadequate attention which was given to formulating and implementing a sound strategy and appropriate interventions which would stimulate expanded private sector investments, from production to value-chain development, driven by market-determined factors. The CAADP processes, strategic priorities, biennial reports on core performance indicators and targets, comparative experiences with other African countries and forward-looking strategy and investment frameworks together provide a relevant roadmap, tools and “peer-level” incentives for encouraging stronger performance by Mozambique --- both backward and forward-looking.

More recently, the CAADP agenda and cross-country sharing of good practices have devoted increased emphasis to the expanded role of the private sector in the agrarian sector, and to encouraging countries to formulate, integrate and implement appropriate private sector ENABLING environment, catalytic prioritized public investments and to expand inclusive private sector investments through competitive value chain development. Mozambique’s next cycle of agrarian sector policies, strategies (known as PEDSA II) and national agricultural investment program (known as PNISA II) provide an opportunity for sectoral leaders to intensify its sector performance and achievement of strategic targets, driven by an expanded private sector role.

1 The percentage of households comprising the “agricultural” population actually carrying out farming activities has declined significantly with more than a quarter (28.1%) not farming at all. The percentage of households with at least one member involved in a remunerated non-farm activity has increased from 21.0% in 1996 to 43.5% in 2015. About 3% of households (around 120,000, mainly coming from the main migrant sending provinces of Inhambane and Gaza) have at least one member working abroad (mainly in South Africa), while the percentage of households with at least one member involved in a self-employed activity has remained constant at around 50%. 2 See MASA, PNISA Assessment (November, 2017).

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3.3 Sector Profile

The agriculture producers in Mozambique can be segmented into three broad categories: (i) large, formal, commercially oriented farms that feed into competitive value-chains, (ii) small-scale, informal subsistence-oriented farms with limited or non-existent opportunities for commercialization that mostly produce for household consumption, and (iii) medium-sized, commercial farms, either formal or informal, with minimal capital assets, such as a tractor, that are sometimes referred to as ‘emergent’ producers. As shown in Table 3.2, smallholder producers dominate the sector, accounting for more than 98.6 percent of all farms. Large farms, which represent the most technologically advanced segment of the Agricultural economy, account for less than 1 percent of all farms and less than 3 percent of the cultivated land area.

The smallholder farms are most numerous in the north, with two provinces, Nampula and Zambezia, accounting for 43 percent of the total. Large farms, in contrast are concentrated in the Center-South provinces (Tete, Sofala and Gaza), which are closer to Mozambique’s capital and major trading partner. These provinces also exhibit lower poverty ratios than the northern ones.

Table 3.2: The Distribution of Farms in Mozambique, by Size and Province 3

Province Small % of Total Medium

% of Total Large

% of Total Totals

o/w Small (%) Niassa 200,051 5.2% 811 1.5% 3 0.7% 200,865 99.6%

Cabo Delgado 365,786 9.5% 3,963 7.5% 20 4.4% 369,769 98.9%

Nampula 726,439 18.8% 1,727 3.3% 21 4.6% 728,187 99.8%

Zambezia 941,187 24.3% 1,466 2.8% 24 5.3% 942,677 99.8%

Tete 359,249 9.3% 8,423 15.9% 62 13.6% 367,734 97.7%

Manica 284,923 7.4% 5,892 11.1% 27 5.9% 290,842 98.0%

Sofala 309,114 8.0% 3,148 6.0% 71 15.5% 312,333 99.0%

Inhambane 196,718 5.1% 15,809 29.9% 28 6.1% 212,555 92.5%

Gaza 203,543 5.3% 8,027 15.2% 200 43.8% 211,770 96.1%

Maputo 279,741 7.2% 3,584 6.8% 1 0.2% 283,326 98.7%

Total 3,866,751 100.0% 52,850 100.0% 457 100.0% 3,920,058 98.6%

Source: Inquérito Agrário Integrado, IAI (2012), referred to in World Bank (2017)

3 Small farms occupy less than 10 hectares, while large farms occupy more than 50 hectares.

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Mozambique is split into ten agro-ecological zones with diverse soil and climate characteristics offering scope for cultivating a wide range of crops. The most important crops from a food security viewpoint are (in declining order) Cassava, Maize, Rice, Wheat and Sugar. Cassava and Maize (and associated products) are mostly sourced from domestic production, while rice and wheat and mainly imported. The lion’s share of the total cultivated land is devoted to the production of food crops, particularly Maize, which alone accounts for almost 40 percent of the total cultivated area; Table 3.3A.

The main cash crops in order of declining export value are Tobacco, Sugar, Cashew nuts, Cotton Sesame, Wheat, Bananas, Sunflower seeds, Soya and Pigeon pea. Tobacco and Sugar alone account for almost one-half of total agricultural export revenues. The area planted with cash crops accounted for 13.5 percent of the cultivated land in 2015. This is only a modest increase from the 11 percent planted a decade earlier.

Agricultural yields in the food staple crops had been stagnating in the previous decade. As shown in the last two columns of Table 3.3C, annual yields per hectare in Maize and Cassava production were negative during 2002-2008. These yields improved in the subsequent decade, but by and large remained modest compared to the gain in yields attained with cash crops (except for pigeon peas). This has important implications for rural poverty, considering that rural poor households are mostly engaged in food crops production.

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Table 3.3A Mozambique: Area Planted of Selected Crops (in Hectares); 2002 -2015

2002 2003 2005 2006 2007 2008 2009/10 2012 2013 2014 2015

Consumption Crops

Maize 1,577,700 - 1,852,000 1,664,000 1,664,400 1,962,700 1,432,131 1,572,000 1,722,500 1,703,500 1,570,526

Cassava 719,800 - 1.108,200 857,700 993,900 953,600 1,038,774 762,600 933,100 870,300 620,605

Total 2,297,500 - 1,852,000 2,521,700 2,658,300 2,916,300 2,470,905 2,334,600 2,655,600 2,573,800 2,191,131

Cash Crops

Pigeon Pea 68,800 157,800 170,300 198,900 190,400 262,948 248,900 379,800 287,100 182,817

Sesame 31,800 - 71,900 68,500 74,200 118,500 97,849 99,000 135,100 139,700 145,510

Soy 1,000 - 8,600 6,500 8,000 13,600 11,928 27,387

Sunflower 9,300 - 4,500 10,000 9,300 9,700 11,332 5,700 13,700 5,300 12,238

Tobacco 42,600 - 89,600 56,000 48,200 62,900 73,630 59,124

Cotton 166,300 - 230,300 256,000 132,800 103,900 62,459 84,316

Total 319,800 - 562,700 567,300 471,400 499,000 520,146 353,600 528,600 432,100 511,392

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Table 3.3B Mozambique: Production of Selected Crops (tons); 2002-2015

2002 2003 2005 2006 2007 2008 2009/10 2012 2013 2014 2015

Consumption Crops

Maize 1,114,770 1,181,278 941,517 1,395,474 1,133,911 1,213,572 1,177,390 1,173,709 1,357,220 1,262,038

Cassava 3,446,043 - 4,782,431 5,481,342 4,959,275 4,054,596 4,098,997 - 4,136,265 3,579,078

Cash Crops

Pigeon

Pea 31,774 - 42,588 36,427 62,271 64,094 113,452 127,265 110,580 69,210

Sesame 4,232 8,321 15,099 18,229 17,141 40,696 53,183

Soy - - - - - 7,139 33,315

Sunflower - - - - - 3,280 7,141

Tobacco - - - - - 46,271 96,552

Cotton 84,675 54,144 78,683 122,287 72,175 69,693 184,141 67,392 82,063 70,051

Source: Mozambican Agricultural Censuses: TIA, CAP, IAI, various years.

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Table 3.3C Mozambique: Yields per Hectare (Kg/Ha) of Selected Crops; 2002 -2005

2002 2005 2006 2007 2008 2012 2013 2014 2015 2002-2008

2008-2015

Consumption Crops

annual rate of change Maize 707 508 839 681 618 749 681 797 804 -2.1% 4.3%

Cassava 4,788 4,315 6,391 4,490 4,251 5,375 4,752 5,767 -1.9% 5.1%

Cash Crops

Pigeon Pea

462 269 531 313 336 456 335 385 379 -4.5% 1.8%

Sesame 133 210 266 231 343 365 26.3% 0.9%

Soy 525 822 - 8.1%

Sunflower 338 584 - 10.4%

Tobacco 736 1,633 - 17.4%

Cotton 509 235 307 543 671 829 5.3% 3.4%

Source: Tables 3.3A and 3.3B.

The Smallholder Sector

The Agricultural sample surveys (TIAs and IAIs) indicate that smallholder producers on average have made very little progress during the period 2002-2015 in the application of inputs or improved agronomic practices, in spite of significant private sector, government, donor and NGO interventions. This explains why improvements in productivity have been modest and remain among the lowest in Africa, demonstrating the huge challenges that lie ahead if significant inroads are to be made in terms of rural poverty reduction.

As shown in Table 3.4, very little has changed over the past 15 years in relation to agricultural practices: to begin, the percentage of households exposed to agricultural extension services has shown an overall downward trend, decreasing from 13.5 percent coverage in 2002 to 4.3 in 2015, with some variation in the years between. Similar declines are observed in regard to the practices of rotating crops, inter-crops and row-planting. The only positive development in agrarian practices appears to be a modest decline in the incidence of slash and burn farming.

Progress in the use of inputs has been extremely low throughout this period, and not showing any signs of improvement. In particular, the use of improved maize seeds has not exceeded 10 percent and coverage remains about the same in 2015 as it was in 2005 (7.1 percent versus 5.6 percent). The application of chemical fertilizers barely increased, from 3.8 to 4.5 percent, while the application of pesticides declined, from 6.8 to 5.1 percent. In both cases, the coverage is minimal.

Most smallholder farms rely on rain-fed agriculture. The use of irrigation has declined slightly, from 10.9 percent in 2002 to 7.3 in 2015, as has the use of animal traction (from 11.4 to 9.2 percent). There has also been virtually no change in the very low rates of permanent and

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seasonal labor hires, which suggests that there has been very little growth in the size of smallholder operations. In part, this may be reflecting the lack of access to affordable credit, which declined from an already extremely low level of 2.9 percent in 2002, to 0.6 percent in 2015. The only other modestly encouraging trend is that the access to market price information improved modestly from 34.5 percent in 2002 to 48.3 percent in 2014.

Table 3.4: The Evolution of Agronomic Practices in Mozambique; 2002 -2015

Percentage of surveyed famers engaging in practice

Table 3.4: The Evolution of Agronomic Practices in Mozambique; 2002-2015

2002

2003

2005

2006

2007

2008

2009/10

2012

2013

2014

2015

Received Extension Advice

13.5

13.3

14.8

12.0

10.1

8.3 - 6.6 8.9 8.3 4.3 Belong to Association

4.5 4.2 3.6 2.8

Improved Maize Seed

5.6 9.3 10.0

9.9 2.9 - - 7.1* Rotates crops 27.2 23.9

Inter-crops 79.8 68.2

Plants in rows 40.8 35.0

Used fire to clear land

28.9 21.4

Leaves land fallow

17.6

Hired permanent labour

2.2 2.0 1.8 2.2 2.6 2.9 5.4 (?)+

2.1 - 1.9 3.3 Hired seasonal Labour

15.5

15.6

17.6

23.8

20.8

18.7

16,5 (?)+

16.0

- 14.7 12.2*+ Applies

chemical fertilizer

3.8 2.6 3.9 4.7 4.1 4.1 3.6 2.8 5.6 4.6 4.5**+ Applied

Pesticide 6.8 5.3 5.6 5.5. 4.2 3.8 2.5 5.7 5.1 4.7 5.1**

*+ Irrigates some production

10.9

6.1 6.0 8.4 9.9 8.8 5.2 8.1 7.3 - -

Uses animal traction

11.4

11.3

9.5 12.8

12.0

11.3

- 7.0 - 9.5 9.2+++ Hires tractor 1.6

Received credit for agriculture

2.9 3.5 2.9 4.7 2.6 2.3 2.0 1.7 1.1 0.6

Obtained pricing information

34.5

47.2

40.3

36.3

35.1

34.1

49.0

43.3

48.4

* Tete 19.9%, Manica 19.6%;n in 2008 Manica had 29.1% of households using improved maize seed.

+ data provided was separate for male and female and so the percentage of households employing a combination of men and

female, only male and only female workers was not possible.

*+ Manica 21.3%

**+ Tete 24.0% (tobacco), Niassa 15.9% (tobacco & cotton)

***+ Tete 13.0% (tobacco), Cabo Delgado 13.1% (cotton), Niassa 12.4% (tobacco & cotton)

++ Gaza 22,8%, Maputo Province 40.3%

+++ Inhambane 54.0% , Gaza 44.1%, Manica 25.0%, Tete 22.8%

Source: Various agricultural censuses in Mozambique: TIA, CAP and IAI.

Livestock holdings demonstrate a gradual increase in the number of households owning cattle, but little change in ownership of goats and chickens, while those rearing pigs have decreased. More than two- thirds of cattle owners use veterinary and dipping services, but only a very few chicken owners vaccinate their chickens, probably because so many smallholders own few chickens, preventing economies of scale.

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Plot size and low percentage of land ownership titles may also be impeding productivity growth. According to PORTUCEL, 2.9 hectares of land is considered the minimal amount of land for a typical household of 5 persons4 to subsist on, applying conservationist techniques. The actual average machamba plot size, in contrast, was estimated at 1.51 hectares (1.26 cultivated) in 1996, and a slightly lower 1.42 hectares in 2010 and 2015, with 36 percent of the machambas measuring less than half a hectare. The 2008 TIA also found, however, that households on average managed 2.3 machambas, so that the total amount of land per household averaged around 3.3 hectares. Even though there are some open questions about the measurement of plot size, this suggests that the average smallholder farm is just barely large enough to sustain a family and, therefore, unlikely to be efficient.5

The 2008 TIA also found that only 1.1 percent of all machambas possess land tenure rights, while 3.8 percent of all households have experienced conflict over their land. Furthermore, 15.8 percent of households recognize the importance of have a clear title, and have expressed the desire to obtain one, but the process for obtaining such titles has been slow and arduous.

It is estimated that only about 15 percent of the 36 million hectares of arable land in Mozambique is currently being cultivated. From that it would appear that enough land is available so as not to pose a constraint for increasing the size of machamba plots and expanding food production. This suggests either that access to land is severely constrained by other factors than availability, or that the main constraint lies elsewhere, namely in the lack of credit and complementary factors of production (e.g., tractors, irrigation equipment), that would permit the average household to manage substantially larger land areas.

The Modern Sector

The modern sector is dominated by foreign investors and is itself segmented into small/medium-sized agri-businesses and large investors. An analysis of foreign investments approved by APIEX showed that, excluding the oil and gas sector, Agriculture was the largest Foreign Direct Investment (FDI) recipient with almost USD3 billion during 2007-2017, representing 27 percent of all FDI (excluding O&G). Two large investments (Matanushka bananas and Portucel forestry) accounted for about half of that total. In terms of total

4 The average household size in 2015 was 4.9 persons, with provincial variations ranging from a low of 4.6 in Inhambane to a high of 5.8 in Manica. Around 30% of all households are headed by females, up from 14% in 1996. The southern provinces of Inhambane and Gaze, which have high levels of external male migration, female-headed households reach 40%.

5 There does not seem to be consistent information on total household farm size that clearly distinguishes between cultivated land, temporarily fallow land and unused land that could or will be used some time in the future for farming or pasture. Although the average size of household plots (machambas) is generally referred to as being between 1-2 hectares, data drawn from the agricultural census refers only to the land cultivated and left “fallow”. This is likely to be significantly different from the actual land allocated to the household by the local leaders (e.g., régulos).

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investment amount in Agriculture, South Africa, Portugal and Norway accounted for 80 percent of the total. With respect to the number of foreign investment projects, the main originators were South Africa (with 41 percent of the total projects), Portugal (11 percent) and Mauritius (8 percent). The average size of South African investments is USD5 million.

The foreign private investors in Mozambique’s agriculture sector, including the South African investors, are sometimes referred to as “footloose investors” who are very mobile in shifting their assets across countries in response to changing incentives and opportunities, much like short term capital flows in the international financial markets. In this regard, Mozambique’s ability to attract foreign investors in agriculture largely depends on the business terms and conditions available in the neighboring countries of Zambia, Malawi, Tanzania and the Congo Democratic Republic.

The experience with foreign investors has not always been positive. As an example, when Zimbabwe introduced its Fast-Track Land Reform Programme of 2000, the province of Manica became very attractive as an alternative production site for displaced Zimbabwean farmers: it was close by, land was effectively free and laborer’s spoke Shona, which most of the Zimbabwean farmers also could speak. Although farming conditions were somewhat different, they were close enough to be familiar. The prospect of cultivating tobacco, in particular, together with a welcoming attitude by the then Provincial Governor, Soares Nhaca, brought more than 60 Zimbabwean farmers to invest in Manica. But things turned sour when the Mozambique Leaf Tobacco company failed, forcing most of Zimbabwean farmers to abandon tobacco. Government bureaucracy, corruption and difficulties in communicating in Portuguese also forced many to leave. Several others stayed to try their luck with a variety of other farming activities (such as flowers for export and horticulture) but many of those farmers then also failed and eventually abandoned Mozambique. Only a handful of the Zimbabwean farmers managed to stay in Mozambique and overcome these problems by establishing production niches, in part with assistance from the BAGC CF.

The experience in Manica is typical of many other foreign direct investments that took place in large-scale enterprises after the civil war ended with the Peace Accord of 1992. Many of these enterprises either failed or are struggling to survive due to over-capitalization, bad management or unrealized demand projections. Examples of such failed investments include Emveste (horticulture) and Mia (rice) in the province of Gaza, Corridor Agro (various crops) and Matanushka (banana) in the province of Nampula, and Rei de Agro (soya) in the province of Zambezia.

In recent years, a more sanguine outlook appears to have taken hold of investors, with several successful outcomes, such as the Crookes Brothers investments in macadamia and maize production in Zambezia, and of bananas production in Maputo, AgroMoz’ investments in soya and beans production in Zambezia, and Westfalia’s investment in production of litchis and avocados, as well as a pack house for exports in Manica. A variety of investments in banana plantations in southern Mozambique, mainly Maputo province, are also proving to be successful, expanding from insignificant volumes to now accounting for 40 percent of the

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bananas marketed in South Africa. The more sanguine outlook among large investors also appears to have rubbed off among some of the smallholders, who have also exhibited some changes in cash crop production by introducing new crops that include pigeon peas, sesame for export and soya as input for the poultry industry.

3.4 Institutional Structure, Arrangements and Roles

Overview. In principle, the Government’s PQG and other subsequent and supporting sectoral strategy documents outline the general intended roles and strategies of public, private, civil society and development partner stakeholders with respect to the agrarian sector. In practice, these roles have been evolving, in an effort to become clearer, complementary to each other and more effective. In this context, the overall challenges include:

• Reducing the high degree of fragmentation of agrarian sector activities and participants, with their evolving and overlapping roles and functions, and

• Ensuring appropriate and effective coordination in the formulation, implementation and tracking of agricultural developments, across both the public and private sectors.

The remainder of this section describes the current arrangements and roles of the key stakeholder groups. It recognizes some underlying dynamics and challenges that determine the pace of required reforms, their effectiveness and the results required for modernizing the agrarian sector. (Those results are addressed in Chapters IV and V).

Public Sector. The envisioned role of the public sector in the agrarian sector is to create an appropriate “enabling environment” and direct interventions to promote agricultural

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development (emphasizing agricultural growth and reduced rural poverty). It is responsible for the formulation and implementation of appropriate agricultural policies/strategies, as well as the provision of public goods and services to farming households.6 These policies and goods/services are provided in line with the Government’s decentralization policy and structure, and resulting complementary institutional arrangements and roles at the national level (5 central government ministries)7 and subnational levels (11 Provinces and 150 districts), under the overall policy guidance of the Office of the Prime Minister. The overall guidance for these national and subnational entities is laid out in the National Agricultural Policy of 1995, the Agricultural Strategy (PEDSA: 2010-2020) and National Agricultural Public Investment Program (PNISA: 2013-2017, which was extended to the end of 2019).

An important instrument for implementing the key policies and strategies of each of these public sector entities are the public expenditures assigned through the Government’s Medium-Term Fiscal Framework (CFMP: Cenário Fiscal de Médio Prazo). The CFMP is a medium-term three-year rolling budget used for planning purposes at the national and provincial levels, and that serves to allocate public revenues and assign expenditures to the GoM State Budget (Orçamento Estatal). This CFMP is also used to allocate public funds to priority activities of the annual (fiscal year) Economic and Social Plan (PES).

These expenditure plans are disaggregated to the level of national ministries and subnational entities, through an established expenditure priorities cycle and corresponding budgetary calendar, and ultimately determined by estimated and actual revenues which determine the budgetary ceilings and eventual budgetary allocations for specific sector and national ministries/subnational entities. There is a parallel Mozambique Agricultural Public Expenditure review which is being completed, and provides further details, including an action plan for promoting enhanced expenditure priorities, processes, and results for accelerating agrarian transformation.

6 Public goods and services are characterized by economists as having the properties of non-rival consumption and non-exclusion, which have the consequence that the market, by itself, will either not produce these goods or only an insufficient amount. So, for example, we have observed a growing level of private extension services being provided to support cash crops, contract farming and competitive value chains; areas that tend to be dominated by large producers. For other crops, however, especially those dominated by smallholder producers (food crops like maize and cassava), the supply of private extension services is very thin, even though the benefits from such services are substantial. This provides the rationale for the public sector to step in and provide more of such “public” services. Other typical examples of public goods include phytosanitary services and certain types of rural infrastructure (e.g., rural roads, electrification). Fertilizers are typically considered a private good, although Mozambique’s Government has been implementing a program to subsidize (through a voucher system) the use of fertilizers by low income farmers. (The Government is currently reassessing the rationale of this program.)

7 These five central government ministries involve: Ministry of Agriculture and Food Security (MASA); Ministry of Land, Environment and Rural Development (MITADER); Ministry of Industry and Trade (MIC); Ministry of Sea, Interior Waters and Fisheries (MMAIP), and Ministry of Public Works, Housing and Water Resources (MOPHRH).

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Private Sector. Thus far, the private sector has made a modest contribution to the transformation of Mozambique’s Agriculture into a dynamic, competitive sector. Most of the private sector is still involved in traditional activities, but there are signs that it is capable of responding when faced with the appropriate government policy framework, and when the right incentives come along. The most numerous private sector participants in the agrarian sector are the farm households, especially smallholders which comprise about 99 percent of all farms. Another large group of private sector participant are the traders, mostly small scale, involved in input and output markets for both domestic and external trade. A third group of participants are the agro-processors, several of which are involved in contract farming, mostly with emerging small commercial farmers for various agricultural value chains. While there is a growing level of foreign direct investment (FDI) in Mozambique’s agrarian sector, the amounts and numbers are fairly small. A large proportion of the FDI actors are South African investors (about 65% of total FDI) involved in various value chains, including a growing trend toward contract farming with smallholders. It is anticipated that the Government’s intentions to expand the role of the private sector in the agrarian sector will have a positive effect in expanding the role of each of the above actors, especially as the agriculture sector becomes more competitive in value chain development.

CSOs and NGOs. There is a growing number of formal and informal civil society organizations (CSOs) and non-government organizations (NGOs), which are playing an active role in supporting different aspects of agricultural development in Mozambique. Many of these are involved in organizing farmers/farmer groups for input and especially output markets.

Development Partners. Mozambique has attracted large numbers of development partners – multi-lateral and bilateral – into providing different types of financial and technical support to the agricultural sector.8 Most of this assistance is provided on concessional terms, given Mozambique’s low level of per capita income. Given the large size and variety of foreign assistance being provided to the agrarian sector, it is surprising that there is currently no donor-supported program designed to formulate and implement a sector-wide approach, including the pooling of sector development funds, under the Ministry of Agriculture in Mozambique.9 This situation could be reflecting an absence of leadership to promote stronger and more effective sector coordination, as well as the absence of a donors/government consensus on the appropriate roles and arrangements/mechanisms for working together. As a result, donor support is mainly provided through several separate projects that target specific agriculture value chains or investments in sectors that contribute to agriculture development, but with limited effort to coordinate or complement activities.

8A recent review of donor-supported programs supporting the agrarian sector development of Mozambique showed that 55 active projects for a total amount of US$1,273 million were under implementation in 2018.

9 The last such sector-wide approaches ended with the PROAGRI2 program that expired in 2010.

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Coordination Arrangements and Mechanisms. Most agrarian assessments worldwide highlight the importance of strong, multi-stakeholder coordination arrangements and processes for transforming Agriculture into an inclusive, competitive and modern wealth-generating sector. Several coordination arrangements involving public and private sectors to different degrees have been established in Mozambique, but these are partially operational and warrant substantial improvements, driven by effective leadership and processes and mechanisms to facilitate working together.

(a) Public Sector. The main coordination arrangement for the agrarian sector is through the Government’s Cabinet system of meetings and decision-making processes, and through intermittent, ad-hoc exchanges of information with officials from different Ministries. The Cabinet agenda is always large, however, and the ad-hoc exchanges have limited effect. As a result, these arrangements do not allow for enough time, focus and depth to make a significant difference. In recognition of these coordination shortcomings, some years ago the Government established a Coordination Committee for the Agricultural Sector (CCSA), to support enhanced multi-stakeholder coordination at the national and sub-national levels, including private sector stakeholders. The CCSA has not functioned for various reasons, however, including the absence of strong and effective leadership at the top levels, and the absence of supporting mechanisms (e.g., a high-level Secretariat to set agendas and follow-up). Currently, there is a proposal on the table to re-activate a more effectively functioning CCSA, which is to be led by the Minister of MASA and engage the active support of the Ministers of the four other sector Ministries, and hopefully count on active support from the Prime Minister’s Office. AGRA has approved funding to establish and staff an Executive Secretariat, with adequately qualified technical staff to help ensure an effective functioning of the CCSA. The Minister of MASA intends to convene the newly created CCSA soon.

(b) Private Sector. Currently, there are several private sector-driven platforms, processes and mechanisms to enhance coordination within the private sector and between private and public sectors. These are functioning partially but will need to be strengthened and become more results-oriented if they are to have their envisaged impact. The most important of these arrangements are listed below:

• The main private sector entity and interlocutor representing the private sector is the Confederation of Trade Association (CTA).

• There is the existing Public-Private Dialogue platform, chaired by the Prime Minister, with CTA.

• Various corridor development programs, such as the Agência de Desenvolvimento do Zambeze (ADZ), seek to promote enhanced collaboration and coordination between public and private sectors in the agrarian sector. These entities can be further strengthened and could play important roles in enhancing coordination and collaboration in practical ways.

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• The Private Sector Working Group (PSWG), currently chaired by Norway, is a Government-development partner advisory group for promoting private sector development and enhanced governance across all sectors. It includes the key actors funding relevant major programs/projects (e.g., USAID’s SPEED+, GiZ’s Promoting Appropriate Environment for Private Sector and other programs with a focus on good governance).

• Coordination at central and provincial levels could also be improved through APIEX (Agência de Importação e Exportação) – an amalgamation of the former CPI, GAZEDA and IPEX – all of which involve agro-based development initiatives.

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Main Constraints Facing the Private Sector

4.1 Overall Business Environment

This chapter seeks to identify the most important obstacles to inclusive and competitive private

sector development, based on several surveys and evaluations that rely on different

methodologies. The first of these is the Global Competitiveness Index prepared by the World

Economic Forum. This Index is built on various statistical indicators (such as average life

expectancy, inflation rate and number of internet users) obtained from either national or

international (e.g., IMF, World Bank, UNDP) sources. The second evaluation of business

conditions is the Enterprise Surveys prepared by the World Bank on the basis of survey

responses provided by the managers of Mozambican firms. The next evaluation is from the

World Bank’s Doing Business indicators, which is based on assessments by various national and

international experts of a country’s legal and regulatory environment as they apply to local firms.

That same expert opinion approach is also used in the Enabling the Business of Agriculture

(EBA) assessments, which specifically focus on the legal and regulatory framework facing agro-

businesses.

Global Competitiveness Index

The Global Competitiveness Index ranks countries according to their performance, as measured by a series of around 100 statistical indicators (classified under 12 pillars in 4 categories) believed to be closely associated with a country’s level of productivity and long-term prosperity. Mozambique’s competitiveness ranking lies near the bottom, with an overall rank of 133 out of 140 countries. This should not come as a surprise, given the country’s early development level and low per-capita income. However, we also find that Mozambique scores better in some areas than others, which may help in identifying the most problematic areas for economic development from the somewhat less problematic ones. The six areas where Mozambique exhibits the least competitiveness are: human capital skills, labor market, macroeconomic stability, health, institutional development and capital infrastructure.

The low ranking in skills reflects shortcomings in virtually all education indicators under this

pillar, while the low ranking in labor markets reflects extremely high redundancy costs, poor

labor-employer relations, disparity in pay and productivity, and low female labor participation.

The low ranking in macroeconomic stability is largely due to the country’s poor debt dynamics

and fiscal weaknesses. The risk of high exchange rate volatility is probably the single most

important concern to foreign investors thinking of investing in Mozambique’s agribusiness

sector. The low infrastructure ranking mainly reflects poor air transport connectivity, unsafe

water and poor road quality. The poor institutional ranking reflects problems with crime and

theft, and poor public financial management practices. Interestingly, the financial system did not

stand out as particularly problematic in general, but individual indicators do give this sector very

poor ratings in the availability of financing for SMEs and venture capital, as well as the

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soundness of the banking system, which is likely connected to weaknesses on the

macroeconomic front.

Table 4.1: Global Competitiveness Indicators, Mozambique 2018

Overall Score (out of 140 Countries) 133

Six lowest scores (in order of importance)

Enabling Environment Institutions 130 5

Infrastructure 130 5

ICT Adoption 122

Macroeconomic Stability 137 3

Human Capital Health 135 4

Skills 140 1

Markets Product Market 115

Labor Market 138 2

Financial System 113

Market Size 104

Innovation Business Dynamism 104

Innovation Capability 120

Source: World Economic Forum, Global Competitiveness Report, 2018

ENTERPRISE SURVEY RANKINGS

The Enterprise Survey ratings show some affinity with the Global Competitiveness indexes, but also some differences. Comparing the top six most problematic areas identified by the Enterprise Survey (Table 4.2) with the six poorest competitiveness rankings (Table 4.1), we find that problems of crime and corruption, and infrastructure shortcomings appear in both listings. However, the problems of human capital skills development and labor market obstacles that came out as the most problematic in the competitiveness index, were ranked much lower in the enterprise surveys. This suggests that domestic entrepreneurs may have learned to circumvent the labor market regulations, which may appear very onerous on paper, but are less binding in practice.

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Table 4.2: Firm manager ratings of the fifteen biggest obstacles to business 10

MOZ 2018 by Firm Size Sub-Saharan

average Small Medium Large Africa

Corruption 16.0 14.0 21.2 18.1 7.2

Access to finance 14.8 13.7 20.2 8.2 23.6

Practices of the informal sector 10.4 9.6 9.7 18.8 11.3

Crime, theft & disorder 9.8 11.4 5.4 9.7 3.4

Political instability 8.6 9.7 3.2 15.2 10.5

Electricity 8.4 8.4 11.1 1.6 13.2

Tax rates 7.9 6.9 11.1 6.6 9.6

Access to land 6.0 5.5 9.2 1.1 4.3

Customs and trade regulations 4.8 6.1 2.2 1.9 4.6

Transportation 4.6 6.5 0.6 0.7 2.9

Business licenses and permits 3.5 3.1 3.5 6.2 1.5

Inadequately educated workforce 2.5 2.5 1.4 5.4 1.6

Labor regulations 1.2 1.4 0.7 0.3 1.0

Courts 0.7 0.2 0.2 6.3 0.5

Tax administration 0.7 1.0 0.2 0.0 4.6

Source: World Bank, Enterprise Survey, Mozambique 2018 Country Profile

Also, domestic businesses may have adapted to the shortage of skilled labor by adjusting their factor mix in production toward greater unskilled labor intensity. Conversely, the enterprise surveys identify access to finance as the second most problematic obstacle to business, while the competitiveness index gives Mozambique a comparatively good ranking in this area. However, both rankings coincide in identifying lack of access to finance as a problem that affects small and medium-sized enterprises much more than the large ones. As can also be seen from Table 4.3, corruption poses a major problem to firms of all sizes, while access to electricity appears to be problematic for small and medium firms, but not for the large firms. Similarly, it is noteworthy that Access to Land is considered the most important obstacle by almost 10 percent of medium-sized firm managers, but only by 1 percent of the large-firm

10 The ratings refer to the percentage of managers that picked a topic-area as the biggest obstacle.

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managers. Conversely the unfair competition posed by the Informal sector ranks in first place as the biggest business obstacle for large firms, while smaller firms give less weight to this item.

Table 4.3 Top three business obstacles; by firm size

Small Medium Large

Corruption 1 1 2

Access to Finance 2 2 -

Crime & Theft 3 - -

Electricity - 3 -

Informal Sector - - 1

Political Instability - - 3

Source: World Bank, Enterprise Survey, MOZ 2018

DOING BUSINESS (DB) RANKINGS

The Doing Business Indicators suggest that there has been a deterioration in Mozambique’s business environment since 2011, with the overall country rank falling from 126th place to 135th place in 2018.11 See Figures 4.1 for a summary of Mozambique’s ranking on doing business on several topics and Figure 4.2 for ease of doing business score. The most significant declines in the sub-categories that contributed to the decline in the overall ranking is the deterioration in the indicators for starting a business and for protecting minority investors. The former dropped from place 96 to 174, and the latter dropped from 41 to 140. While there were also declines in other indicators (enforcing contracts, obtaining credit and paying taxes), none were as dramatic as the first two. On the other hand, there was also some improvements over the years, especially regarding getting construction permits and trading across borders.

Looking at the most recent indicators, Mozambique appears to have advanced well in opening up its economy, or at least in removing tariff and non-tariff barriers to international trade. This improvement was also reflected in the previous indexes, none of which called attention to the customs and trade regulations as being particularly problematic. At the same time, the Enterprise survey did not highlight Business licenses and permits as exceptionally problematic.

11 It is relevant to recognize that Government is taking initiatives to address these business indicators at both national and subnational levels. Through MIC, Government is carrying out a Doing Business assessment by Province to ascertain comparative performance, based on 4 core indicators.

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It is surprising then that the poorest indicator should turn out to the red tape associated with Starting a business. This indicates that the procedures to start new businesses are still very complex, even though the Government had introduced the BAUs (Balcão de Atendimento Único) to simplify the process of registering and licensing companies.

The second most problematic area for business (Enforcing contracts), as well as the fourth (Protecting minority investors) and fifth (Registering a property) most problematic areas, can be loosely subsumed under the heading of institutional development, which had also been identified in the competitiveness index and the enterprise survey evaluations as especially problematic In regard to registering properties, the land registry has been computerized, and titles have been scanned, but the overall procedures are still very complex and costly.

Table 4.4: World Bank Doing Business Indicators

2011 2016 2017 2018

Country Rankings

Overall Country Rank 126 134 137 135

(out of total number of countries:) (187) (190) (190) (190)

Starting a business 96 121 134 174

Enforcing contracts 129 184 185 167

Getting credit 125 152 157 161

Protecting minority investors 41 129 132 140

Registering a property 153 104 107 133

Paying taxes 98 111 112 125

Getting electricity na 166 168 100

Resolving insolvency na 65 65 84

Dealing with construction permits 159 29 30 64

Trading across borders 136 105 106 41

Source: World Bank, Doing Business, various years.

It is notable that the availability of credit also emerged as important an obstacle to business in the Doing Business ratings as it did in the Enterprise Survey results. The availability of and access to credit remains one of the most important drivers of growth in agribusiness, and its low ranking mirrors the limited availability and effectiveness of the financial system as is evident by the lack of credit unions, agent banking, e-money and warehouse receipts.

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Paying taxes has become less onerous in recent years and, in general, operators do not have major issues with the tax administration, other than the system being a bit complex, information being a bit difficult to come by and having to deal with several different institutions. However, the Value-Added Tax (VAT) and the Simplified Tax for Small Producers (ISPC) remain an important probl