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Mining vs Prosperity: World Bank gives Mozambique tips on avoiding a ‘painful bust’ as minerals boom beckons

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The World Bank has forecast that Mozambique government revenues from the country’s coal and gas sectors could be $9-billion by 2032, which would represent 7% of the country’s gross domestic product and 21% of total government revenues.

This prediction is contained in the global institution’s latest policy note on the country, entitled ‘Generating Wealth from Mozambique’s Natural Resource Boom’, which was publicly launched in Maputo on April 10 (although the note is dated January 2014). The forecast is contingent on current coal and gas projects being executed as planned.

“The coming boom in Mozambique’s extractive industries could dramatically reduce poverty in the medium term and help to establish the foundation for sustainable growth and shared prosperity,” it states. “As in many other resource-rich countries, it will be challenging to manage natural resources and maximise the benefits for Mozambique. Effectively utilising resource wealth poses complex challenges for macroeconomic and fiscal policy. Commodity prices are very volatile. Excessive public expenditure growth may also affect short-term macroeconomic stability. High-value resource exports may also cause an appreciation of the real exchange rate, damaging the price competitiveness of non-resource industries.”

“The actual value of resource revenues by 2032 is highly unpredictable,” cautions the note. The possible range for these revenues is from $4-billion to $17-billion, which means that the “total annual resource envelope” would be between $36-billion and $50-billion. “These revenues will likely be subject to significant volatility and unless measures are taken to address it, this volatility will be transmitted to the Budget.”

The note points out that mineral resources are, by definition, finite and that spending the revenues obtained from them on consumption rather than on physical infrastructure or human capital development will mean that sustainable income increases will not happen. Moreover, spending such finite revenues on consumption could require “difficult fiscal adjustments” in later years.

So, what should Maputo do to avoid these problems and generate wealth for the country and people as a whole? The World Bank policy note makes a number of recommendations.

Key, it points out, to converting resources wealth into long-term growth and development is good quality government, integrity of public institutions and transparency in the management of public finances. Popular expectations must be managed and consensus on the national resource policy be developed (government transparency and accountability are important for this). While the Mozambique government has made progress in improving its administrative capabilities, more still has to be done. Improving public investment management, for example, should be a top priority.

On the fiscal front, policy should allow the “frontloading” of public development investment while ensuring sustainability. Fiscal targets (particularly an expenditure-growth target and a nonresource primary balance target) should be used to both fulfill the fiscal framework’s objectives and to measure the progress made towards them. “A fiscal rule could help to keep the growth of an already large public sector in line with its administrative capacity, while a resource fund would insulate the Budget against the volatility of resource revenues and allow a portion of present revenues to be reserved for future spending.”

Those revenues from natural resources that surpass government’s spending capacity could be saved in a resource fund. “Mozambique should consider adopting a comprehensive sovereign asset and liability management policy that includes both public assets and government’s (implicit and explicit) liabilities.”

On the other hand, government’s consideration of establishing a national development bank is a matter that “should be treated with a great deal of caution given the risks involved”. In countries with less developed capital markets, “the international experience under-scores a number of important risks arising from nonperforming loans and from these institutions’ typically limited ability to gauge creditworthiness and low capability to collect on loans of execute collateral”.

“In conclusion . . . government should consider an approach that combines a controlled increase in public spending with the progressive accumulation of savings,” states the note. The team that prepared the policy note was led by World Bank Mozambique senior economist Enrique Blanco Armas.

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