MOZAMBIQUE: An Introduction

THE MOZAMBICAN ECONOMY 

Economic growth in Mozambique is expected to accelerate to 5% in 2023. Growth prospects are more positive for the medium term, with GDP expected to grow by 6.5% in 2023 on the back of increases in liquefied natural gas production and exports. Inflation is expected to average 11.5% during 2023, pushed mostly by domestic demand during an economic recovery, according to the latest report on the country by the Economist Intelligence Unit (EIU).

According to Mozambique Government the Economic and Social Plan and State Budget (PESOE) for 2023 aims to set annual macroeconomic targets, aiming to achieve a growth in Gross Domestic Product (GDP) of 5% and maintain the average annual inflation rate at 11.5%.

In any case, the IMF’s figures, which usually serve as a barometer for the financial world, point to a 4% GDP growth in 2023.

According to World Bank Mozambique’s 2022 Economic Update notes, growth is expected to accelerate in the medium term, averaging 5.7% between 2022 and 2024, as demand recovers further and the economy benefits from the start of LNG production in 2022 and anticipates the resumption of larger LNG projects. These are expected to stimulate the extractives sector, increase demand for services, and boost exports. Agricultural output growth is expected to remain significant, subject to favourable weather. However, substantial downside risks remain, including rising international oil and wheat prices owing to the war in Ukraine, natural disasters, and a deterioration in the security situation in northern Mozambique, which may increase public spending pressures, among others.

Mozambique and the IMF team reached in September 2022 a staff-level agreement on the economic and financial policies that could support the approval of the First Review of the programme under the ECF arrangement.

The ECF, also known as Extended Credit Facility, provides financial assistance to countries with protracted balance of payments problems.

“All quantitative and structural benchmarks set for the first review have been met and good progress was made on the broader structural agenda. Looking ahead, the macroeconomic environment remains challenging."

"The authorities aim to continue implementing their ambitious economic reform agenda, including a sovereign wealth fund law, reform of public sector remuneration, and the amendment of the public probity law."

The agreement awaits the approval of the IMF Executive Board in December, which would enable the disbursement of about US$63.8 million.

The Washington-based institution welcomed the Bank of Mozambique (BoM) response to contain inflation which it called “proactive”.

The volume of exports from Mozambique registered an 80% growth in the first half of 2022. Of total exports, 98% went to Southern African Development Community (SADC) countries and 2% to the rest of the world. Power, heavy sands, aluminium, coal and agricultural products were most significant.

On 14 November 2022 Mozambique flagged off its first shipment of liquefied natural gas, exports that could help ease Europe’s energy crunch as Russia squeezes supplies. For Mozambique - one of the world’s poorest nations - it marks the end of a decade-long wait to monetise one of Africa’s largest offshore gas fields. Mozambique has set high hopes on vast natural gas deposits – the largest ever found south of the Sahara – that were discovered in the northern Cabo Delgado province in 2010. But the region has since been hit by an insurgency waged by a Daesh-affiliated militant group that has cast doubts over the viability of LNG exploration sites, and stalled progress.

The African Development Bank (AfDB) in Mozambique anticipates a consolidation of economic growth, not only with more robust figures, but with a different configuration, and expects growth to “expand into more sectors” and be “more inclusive”.

China is one of Mozambique’s largest trading partners and is also a large financier and constructor of public infrastructure in Mozambique. It has also been involved in the LNG Rovuma Basin Project through the China National Petroleum Corporation group, which has reportedly already invested more than USD5 billion in the consortium of the Area 4 block in the Rovuma Basin, led by the Italian multinational Eni, where China National Petroleum Corporation has an indirect stake of 20%. South Africa, Portugal, India and Japan are also important trading partners and have been increasing their investments.

Despite significant investment opportunities in various sectors, the trend in recent years has been the influx of foreign investment mainly in the areas of public infrastructure, natural resources and energy, particularly in relation to the construction and rehabilitation of bridges, roads and airports, power generation and transmission facilities ─ mainly through public-private partnerships ─ and the development of Mozambique's extensive coal, graphite, heavy sand, gemstones and natural gas resources.

Foreign Investment in Mozambique 

The Government of Mozambique encourages foreign investment and the country offers significant investment opportunities in various sectors, such as agriculture, fishing and aquaculture, extractive industries, tourism, public infrastructure, natural resources and energy. Investment, including foreign investment, is subject to specific legislation.

The extractive industry in Mozambique received nearly USD2 billion in Foreign Direct Investment (FDI) as of 2021; most of this investment was absorbed by oil and gas companies. FDI flows to the extractive industry representing over 80% of the total foreign investment allocated to Mozambique.

The Mozambican Government approved the Investment Law and Regulation to promote and foster foreign investments in the country, granting various benefits and incentives which include tax and custom duties exemptions, free remittance of funds and the possibility of hiring more foreign workers than those permitted by law. These incentives will vary according to the economic and industrial activity pursued and the region of implementation of the project in the country.

Private foreign and national investments are granted a set of benefits, which include, among others, deductions from the taxable amount in the scope of corporate income tax and exemptions from custom duties on imports. The minimum eligible value of direct foreign investment for the purposes of the benefits referred to above is MZN7.5 million (approximately USD117.000,00 – note that the principle is that at least USD100.000 shall be invested).

Direct foreign investment is considered to be any form of foreign capital contribution for which a pecuniary value can be ascertained, coming from abroad and intended for the realisation of an investment project in Mozambique, through a registered entity operating in Mozambique.

The direct foreign investment can take one of the following forms: (i) freely convertible currency; (ii) equipment and relevant spare parts, materials and other imported goods; and (iii) the granting, in specific cases and under the terms agreed upon and approved by the authorities, of concession rights to use patented technologies or registered trademarks for which remuneration is limited to the participation in the distribution of profits resulting from the activities in which such technologies or trademarks have been or shall be used.

Investment projects approved under the legislation are eligible for the following benefits, based on their location and/or activity:

(i) guarantee of protection of ownership rights;

(ii) guarantee of the transfer of funds (profits or dividends, royalties, amortisations and interest from loans and foreign capital invested and re-exportable abroad; and

(iii) grant of tax benefits.

The Investment Law and the Tax Benefits Code apply to investments of an economic nature carried out in Mozambique which intend to benefit from the guarantees and incentives set above, including those investments carried out in industrial free zones and in special economic zones, regardless of the nationality and the nature of the investor. Notwithstanding, this legislation shall not apply to investments made or to be made in the areas of prospecting, research and production of petroleum and gas and in mineral resources extraction industries, which are governed by sector-specific legislation.

Dispute Resolution and Bilateral Investment Treaties

Mozambique is a signatory to the Washington Convention of March 1965 relating to the Settlement of Investment Disputes. Under the investment law, the State agrees to submit disputes with foreign investors to arbitration.

The Investment Law contemplates the following possible arbitration mechanisms:

• Arbitration through the International Centre for the Settlement of Investment Disputes ("ICSID") under the Washington Convention of March 1965 relating to the Settlement of Investment Disputes (the "ICSID Convention");

• ICSID arbitration under the ICSID Additional Facility Rules to the extent that the investor is a national of a state that is not a signatory to the ICSID Convention; and

• International Chamber of Commerce Arbitration in Paris. The Multilateral Investment Guarantee Agency (MIGA) — a World Bank affiliate ─ insures against political risks in Mozambique.

Foreign investors should also take into consideration the protection provided by bilateral investment treaties when structuring their investments. To date, Mozambique has entered into Bilateral Investment Treaties with the following countries: Algeria, Belgium, China, Cuba, Denmark, Egypt, Finland, France, Germany, India, Indonesia, Italy, Mauritius, the Netherlands, Portugal, South Africa, Spain, Sweden, Switzerland, the United Kingdom, the United States, Vietnam and Zimbabwe.

In addition, it has treaties for the avoidance of double taxation in place with the following countries: Botswana, India, Italy, Macau, Mauritius, Portugal, South Africa, the UAE and Vietnam.