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Mozambique, Aid and Foreign Investment Trapped between Scylla and Charybdis?

December 2012

Ramdoo, I. 2012. Mozambique, aid and foreign investment: Trapped between Scylla and Charybdis?. GREAT Insights, Volume 1, Issue 10. December 2012. Maastricht: ECDPM

Mozambique is set to become a global player in minerals and gas production, paving the way for large autonomous revenues from its extractive sector. In 2011, the first large exports of coal, coupled with strong economic growth, propelled by high foreign direct investment inflows, large infrastructure projects and strong agricultural growth, contributed to the impressive 7.2% real growth rate. In the coming years, the potential windfall gains from coal and gas is expected to reshape Mozambique’s economic and human development(1).

New opportunities, new players

The new economic outlook of Mozambique and the future availability of rents and revenues are expected to have wider political ramifications, not only at the national level, but also within the international community. Considered as a donor darling, today, Mozambique entertains one of the most elaborate budget support partnerships, with annual aid flows averaging almost a quarter of annual gross national income and direct budget support accounting for almost half the budget (51.4%) until 2010. Since then, with new revenues from its natural resources, budget support decreased significantly, to reach 39.6% in 2012 and that trend is likely to accelerate as of 2017 when revenues from hydrocarbon sector will start to flow in.

Substantial mineral findings have attracted significant foreign direct investment (FDI) flows, enough to dwarf aid flows in the short-to-medium term and ultimately wipe them out in the longer-term. Investments will certainly create opportunities that could potentially transform the Mozambican economy if the political factors and business climate are favourable to such transformations. They are expected to create jobs, augment the capital stock, boost infrastructure and generate revenues. But these are not without risks. Past experience in Africa has shown that in the particular case of extractive sectors, investments by large multinationals have produced isolated economic sectors, have created little jobs and value addition and have managed to negotiate favourable contracts, and have ultimately contributed insufficiently to government revenues.

The Golden Triangle: Balancing partnerships for better development outcomes

Donors in Mozambique have so far engaged in budget support modalities with the objective of contributing to strengthening the core of state functions. But the new situation is likely to significantly reduce the leverage donors have to influence governance, resulting in the government gaining more autonomy in policy making. This potential swing between budget support and FDI brings about a fundamental question. Will investors then be a better trigger for Government to improve the delivery of public goods and services or will withering aid carry in its wake weathering support to institutional building and better governance structures?

The challenge for Mozambique will be to manage its partners: it will have to deal with increasing investors courting for the best possible deals to exploit resources and with development partners that will have to engage differently. And it will have to juggle with (new forms of) engagement with the private sector. Traditionally, the track record of engagement with large multinational extractive industries has not always been positive. Critics have emphasised the fact that extractive industries have often operated in isolation and have contributed little to job creation, to fiscal revenues and to industrialisation. Besides, their engagements with the local communities have sometimes been tense, hence the need to engage differently and constructively.

In parallel, Mozambique will need and will receive less aid. But does that mean that development partners will suddenly become irrelevant? So far, the extensive experiences within budget support partnerships in strengthening gradual institutional reforms of state functions have shown some positive results. But adapting aid strategies to the changing economic and political incentives will be a major challenge both for Mozambique and for its partners. This will require fundamental paradigm shifts in their mindset and in their way of engagement.

The way forward

The new architecture that is setting in place calls for new forms of coalition between the Government, the extractive industries and the donor community. As much as it is an opportunity for donors to re-think and redefine their engagement with Mozambique, it calls for the Government to adopt an inclusive approach in order to generate synergies and complementarities with these actors that have so far played a crucial role or are expected to do so in the future.

On the operational side, there has been little coherence and alignment with what the industries attempt to do on their side to contribute to development, with what the donors and the government agree to achieve together at the national or sub-national level, in particular to promote transparency and domestic resource mobilisation. Mozambique will need to bring all its partners to the table to engage constructively on concrete development outcomes if it wants to tap onto the value added of each partner.

Isabelle Ramdoo is Policy Officer at ECDPM

Footnote
1. See Mozambique: African Economic Outlook 2012

This article was published in Great Insights Volume 1, Issue 10 (December 2012)

 

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