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Foreign Investment – New Opportunities for a Sustainable Economic Growth

Foreign Investment – New Opportunities for a Sustainable Economic Growth

  • Capranzine Hunguana • Head of Treasury Execution Services of Absa Bank Mozambique

In my previous article, I had the opportunity to illustrate the importance that Foreign Direct Investment (FDI) has for the Mozambican economy through the positive correlation of FDI with economic growth, as well as its prospective role in relation to the levels of that growth.

Also in the same article, I highlighted the boost that the mega-projects in coal mining have had on the Balance of Payments in the last decade and the preponderant role of investments in the hydrocarbon sector in the medium and long-term development prospects of the national economy.

In light of the challenges that the country faces in combating terrorism in the north and the successive postponements in the implementation of investments for the exploration of Liquefied Natural Gas (LNG) in areas 1 and 4 of the Rovuma Basin, it is urgent to reflect seriously on our options for attracting foreign investment to accelerate economic growth in the short and medium term, obviously noting that the large scale of investments in the LNG industry maintains the hydrocarbon sector as the main vector for quickly turning Mozambique into a middle-income economy.

At this moment, Agriculture is the sector with the greatest weight in the economy, with about 26.2% preponderance in the Gross Domestic Product (GDP), while Hotels and Tourism holds only 1.0%. Looking at the growth in GDP in the second quarter of 2022, which reached 4.59%, we can see that Agriculture grew by 5.1% and Hotels and Restaurants by 7.6%.

Even in the context where these levels of growth occurred after the relaxation of restrictions in the fight against covid-19, the growth observed in several sectors remains low to reach the potential GDP of the economy, that is, the maximum amount of output that the economy can generate, in a sustainable manner, without inducing an increase in the inflation rate.

The main assumption for achieving potential GDP is the achievement of full and productive employment with decent work for all. Target 8.5 of the Sustainable Development Goals (SDGs) states that “by 2030, achieve full and productive employment and decent work for all women and men, including for youth and persons with disabilities, and equal pay for work of equal value” in order to promote inclusive and sustainable economic growth with an annual growth of at least 7.0% of GDP in the least developed countries.

Agriculture deserved some emphasis in the SAP framework, given its high weight in the economy
In the case of Mozambique, the majority of the economically active population, especially women, is engaged in (subsistence) agriculture and related sectors, and abundant land is the main production factor. Despite the weight of agriculture in the economy, it is not enough to meet the country’s food needs.

In other sectors with less weight, such as Tourism, the existing human capital and land are exploited below capacity. In order to change this scenario, there is a need to promote investments that generate employment, taking into account the labour force available in the Country, the vast amounts of idle or underused land and the renewable resources.

The Economic Acceleration Programme (EAP) addresses some of the challenges in attracting and promoting investment in key sectors. The reduction in the VAT rate from 17.0% to 16.0%, the reduction in the IRPC rate from 32.0% to 10.0% in Agriculture and Aquaculture and other tax incentives are all contributing to improving the competitiveness of the Mozambican economy in the region.

Other measures set out in the SAP include (i) revising the entry visa regime to promote a greater flow of tourists and businessmen – especially for travellers from countries without a Mozambican embassy or consulate; (ii) improving the competitiveness of national airports and logistics corridors – providing better opportunities for tourists and businessmen (iii) the allocation of 10% of tax revenues from natural resources to the development of provinces where extraction occurs; (iv) the simplification of procedures for capital repatriation – noting that the revision of foreign exchange legislation is already under discussion; (v) adjustments to the Labour and Investment Laws in order to make them more attractive to foreign investment, etc; are a step in the right direction for improving the business environment and facilitating FDI.

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Certainly, the success of these and more reforms will need a redoubled effort from the Government and Parliament to ensure their effective implementation and oversight. In the continent’s most industrialised economy, South Africa, Tourism contributed 2.4% of GDP in 2019. In Mauritius and Cape Verde, Tourism revenues contributed approximately 15.2% and 27.8% of GDP in 2019. According to World Tourism Organisation data on the number of workers in the sector in 2020, Mauritius has about 31,000 (2.5% of the population), South Africa has about 740,000 (1.2% of the population) and Cape Verde has about 68,000 (12.4%).

Mozambique has a Tourism weight close to 1%, even in the periods before the pandemic, which makes it even more relevant to invest in the sector in order to achieve target 8.9 of the SDGs which is to, “by 2030, design and implement policies to promote sustainable tourism that generates jobs and promotes culture and local products.”

Other measures that can make economic growth more sustainable are: (i) the promotion of Special Economic Zones, including Free Trade Zones, that guarantee important investment flows and ensure the development of local industry and create jobs; management of fiscal and monetary policies that promote the reduction of the cost of doing business, including a low interest rate environment that allows economic operators better access to the debt market; (iii) reduction of the administrative burden applicable to startups; (iv) use of land use and benefit titles as collateral; and (v) a greater fight against corruption.

The other side of the coin with regard to reforms aimed at facilitating FDI are the obligations that the state should impose and charge on foreign investors. FDI will only be sustainable in the long run when it comes accompanied by transfer of technical and professional skills to local workers at all levels and introduce technological advances so that per capita production is increasingly higher.

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