Annual Report 2007

Political and Economic Environment
Mozambique’s economic performance in 2007
was very encouraging. The economy grew by an
estimated 7%, slowing down only slightly from
the 9% achieved in 2006. Following years of
depreciation, the local currency started to gain
against the US dollar and the South African rand.
By September, the metical had appreciated by
1% against the dollar and by 2% against the rand.
Annual inflation was stable at around 12%. In December,
Standard & Poor’s raised Mozambique’s
country rating from B- to B+.
Despite these very promising macroeconomic indicators,
Mozambique remains one of the poorest
countries in the world, ranking 172nd out of 177
in the UNDP Human Development Index. Tax income
remains relatively low, leaving the Mozambican
budget still heavily dependent on donor
funding. Public expenditure in 2008 is projected
to reach about USD 3.6 billion, but revenues from
taxation and other domestic sources are forecast
to cover only 44% of that total. The deficit of just
over USD 2 billion will have to be bridged almost
entirely with foreign aid.
Direct budget support will constitute 49% of total
foreign aid in 2008, and 51% will be earmarked
for specific programmes and projects. To avoid
incurring unsustainable debt, the government
has ensured that over two thirds of this foreign
aid consists of grants, with less than one third
being provided in the form of loans.
Mozambique suffers from a growing trade deficit,
and over three quarters of its export earnings
come from just three products – the aluminium
ingots produced at the MOZAL smelter on the outskirts
of Maputo, the natural gas piped from Inhambane
province to South Africa, and electricity,
mostly produced at the Cahora Bassa dam on the
Zambezi and sold to South Africa and Zimbabwe.
Agriculture is still the predominant sector of the
economy, employing roughly 78% of the population.
This sector has considerable growth potential,
but Mozambique’s farmers will probably face
increasing competition when trade is liberalised
within southern Africa in 2008 under the South
African Development Community (SADC) treaties.
Exploration of titanium-bearing heavy sands be-
gan this year at the Moma Mines near Nampula.
Further large-scale mineral extraction projects
are due to be launched soon in Chibuto, in Gaza
province.
2008 is set to be a momentous year for the region
with the official launch of the SADC Free
Trade Area slated for August. In some African
countries, including Mozambique, there are not
enough qualified people or resources to provide
the momentum required to make decisive progress
towards regional integration. South Africa
accounts for about 72% of the combined GDP of
the SADC countries, whereas Mozambique contributes
only 2%. Government leaders and analysts
have appealed to the Mozambican industrial
sector to prepare for the challenges presented
by free trade. The sector must become more competitive
in order to ensure that the country is not
swamped with imports.
Financial Sector Developments
M a n a g e m e n t B u s i n e s s R e v i e w 1
Developments in the financial sector reflected
the overall economic situation. The total assets
of the banking sector grew by 30%, reaching
USD 3.4 billion. About 89% of total assets were
concentrated in four of the country’s 12 supervised
financial institutions. Asset growth was
driven by a rise in deposits of 37%. Credit to
the economy rose much less rapidly than deposits,
increasing by 13%. The banking sector
was highly liquid, with a deposit-to-loan ratio of
192% as of December 2007, compared to 162%
in 2006. Banks invested their excess liquidity
in treasury bills and government bonds. The
average return on equity in 2006 was 31.3%
for the banking sector as a whole, including
commercial banks, the central bank and
microfinance banks.
The Government of Mozambique views the financial
system as essential for promoting the country’s
economic development. In 2007 the Bank of
Mozambique (BM) promoted increased access to
financial services throughout the country, especially
in the areas that are less well developed but
have great potential for growth and business.
The banks have responded to this initiative, expanding
their networks and financial services to