Mozambique - Agricultural sector memorandum (Vol. 1 of 2) : Summary

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16529 MOZ MOZAMBIQUE AGRICULTURAL SECTOR MEMORANDUM VOLUME I: SUMMARY April 30, 1997 - Africa Region Agriculture and Environment  SUMMARY: TABLE OF CONTENTS A. CURRENT STATUS OF MOZAMBICAN AGRICULTURE ..................................................... 1 B. MAJOR FINDINGS OF THE MEMORANDUM ............................................................... 5 (a) Raising smaliholder agricultural production is an effective way of addressing poverty ...... 5 (b) Smailholde rs are the most efficient farmers ................................................................... 7 (c) The private trading system is recovering ...............................; 8 (d) Integration in regional grain markets will dominate long-distance internal (north-soutlh) trade .............................. 9 (e) Food security is attainable without continued government-directed food aid .................... 10 (f) Local cashew processing can compete at world standards .................................1................ 11 C. CONSTRAINTS ON AGRICULTURAL GROWTH ........................................................ 12 D. A VISION OF MOZAMBIQUE'S AGRICULTURAL DEVELOPMENT ................................ 15 E. GOVERNMENT POLICY STATEMENTS ........................................................ 21 F. AN AGRICULTURAL DEVELOPMENT STRATEGY FOR GOVERNMENT ......................... 22 (a) Principles of Govemment intervention ............................................................ 23 (b) The incentive framework ............................................................ 24 (c) Rural transport and communication infrastructure ............................................................ 28 (d) Public services: research and extension ............................................................ 29 (e) Regulation ............................................................ 30 (f) Public services: health, education, water .......................... .................................. 3 1 (g) The Public Investment Program ............................................................ 31 (h) The Roles of IDA, other International Agencies, Donors, and NGOs ................ .................. 32 (i) Timing of operations and a short-term action plan ............................................................ 34 (j) Timing of operations: matrix ............................................................ 36 ii  CURRENCY EQUIVALENTS Currency Unit - Metical (Mt) US$1.00 = Mtl 1,378.00 in February 1997 FISCAL YEAR April 1 -March 31 WEIGHTS AND MEASURES Metric System ACRONYMS AGRICOM - Agricultural Marketing JVC - Joint Venture Company Enterprise LOMACO - JVC formed by Government and DINAGECA - National Directorate for Lonrho Geographv and Cadastre MOA - Ministry of Agriculture (and DRC - Domestic Resource Cost Coefficient Fisheries) ENSO - El Niuo-Southern Oscillation MSU - Michigan State University ESRP - Economic and Social Rehabilitation Mt - Metical Program MT - metric ton FAO - Food and Agriculture Organization NGO - Non-governmental agencies GDP - Gross Domestic Product PDP - Priority Districts Program GEF - Global Environment Facility PTIP -Triennial Program of Public ICM - Instituto de Cereais de Mocambique Investment (Cereals Institute of Mozambique) PUPI - Small Unit for Intensive Production IDA - International Development RIF- Rural Investment Fund Association ROCS -Roads and Coastal Shipping IFAD - Intemational Fund for Agricultural project Development SIMA - System of Agricultural Market INDER - Rural Development Institute Information INIA - National Agricultural Research UNDP - United Nations Development Institute Programme Vice President: Mr. Callisto E. Madavo, AFR Country Director: Ms. Phyllis Pomerantz, AFCO2 Technical Manager: Ms. Sushma Ganguly, AFTAI Task Team Leader: Mr. Peter G. Moll, AFTA] . .  ACKNOWLEDGEMENTS An initial mission to Mozambique took place in November 1993, led by Mr. Jean-Paul Chausse (then AF6AE). Participants included: Ms. Paola Agostini (forestry), Mr. Amos Ben Mayor (extension and research), Ms. Christine de Voest (food aid and food security), Mr. Pierre Haas (farmers' associations), Mr. Peter G. Moll (comparative advantage and farm efficiency), Mr. Augusto Moreno (the institutional environment), Mr. Raymond Noronha (land management), Ms. Adelina Paiva (pricing and incentive policy), Mr. Gale Rozell (privatization and the private sector environment), Mr. Lloyd Strachan (input supply and marketing), Mr. Jorge Tembe (farming systems and sub-sector notes). The first draft was prepared by Mr. Jean-Paul Chausse; the report was completed by Mr. Peter G. Moll. Thanks are expressed to Messrs. Jean- Paul Chausse, Inacio Manecas and Luigi Marcuccio for their assistance and to Mr. James Coates for his guidance. The Peer Reviewers were Mr. Graeme Donovan and Mr. Gene Tidrick. The work was carried out under the supervision of Mr. Jean-Paul Chausse (then Chief of the AF I AE Division), and subsequently under Ms. Sushma Ganguly (Technical Manager for Agriculture and Environment, Eastern and Southern Africa). The Country Director is Ms. Phyllis Pomerantz. iv  A. Current status of Mozambican agriculture 1. Agricultural output in Mozambique is increasing. FAO estimates put the 1996 grain harvest at 1.4 million tons, the highest in two decades. Agricultural marketing increased by an estimated 18 percent between 1995 and 1996. The good rains of 1995/6 helped, but there were other factors as well: the return of exiles and the return of deslocados to their farms, the sustained peace, the improvement in the trunk and secondary roads, and the increase in the price of maize at the farm gate owing to the substantial involvement of small traders in marketing. Significant increases in cropped area have been reported in some parts.2 2. Table I presents growth rates of marketed agricultural output for the period 1992-1996. Marketed output fell by 1 I percent in 1992, mostly on account of the extended drought, pulling down the rate of growth of GDP as well. When rains returned to normal in 1993, the sector grew by a substantial 21 percent; it grew by 5.0 percent in 1994, 6.9 percent in 1995, and 9.4 percent in 1996, according to the understated Government statistics. True production numbers are probably much higher.3 Table 1. Percentage Growth Rates of Agricultural Output, 1992-1996 a 1992 1993 1994 1995 1996 Crops -11.2 22.7 4.9 7.0 9.8 Livestock -13.5 3.0 7.8 4.3 3.3 Sector -11.3 21.4 5.0 6.9 9.4 Source: National Plan Commission (1995), table "Producao Agricola e Pecuaria, data de revisao 05/02,/95"; Republica de Moqambique (1995b), pp. 24,29 and 31: and Republica de Moqambique (1997), table "Quadro Global da Agricultura e Pecuaria". a Production volumes of the commercial sector plus marketed production of the smallholder sector plus 'autoconsumo" or non-marketed production of the smallholder sector. 3. The share of agriculture in gross domestic product is approximately 37 percent. Agriculture is the basic means of support for roughly 69 percent of the population. Agriculture and renewable natural resource exports constitute about 76 percent of all exports. Shrimps and prawns constitute the single largest export item in Mozambique, accounting for over a third of total registered exports (Figure 1).4 ' From: World Bank (1996b). 2 For instance, in the Monapo district of the northern province of Nampula, the area sown by the average household increased by some 80 percent between 1992/3 and 1994/5. See footnote 58 for details. No aggregate data are yet available on areas sown and yields for the 1995/6 season. 3 See paragraph 49 for further detail. 4See further detail and sources in the Appendix Tables.  Note: Total exports in 1996 Shrimp & were US$226 million. Prawns 35.5% Miscellaneous 3 1.7% Petroleu C5-ashew Nuts 1.2% Copra Sugar Cotton 19.2% 1.1% 5.7% 5.7% Figure 1. Commodity composition of exports, 1996 (percentages)5 4. As is shown in Figure 2. total registered exports of all sectors (agriculture and other) grewv from $105 million in 1989 to $226 million in 1996, with an average growth rate of about 12 percent p.a. Export crops contribute some 33 percent of total exports. Cashew nuts constituted the largest export crop, with almost one half of the total up to 1992. The sub-sector declined dramatically in the subsequent two years, falling to just two percent of total exports in 1994, but rose to 19 percent of exports in 1996. Cotton is the second largest export crop, with an average value of exports close to 10 million dollars in 1989-1996. The third place belongs to sugar, with average annual exports valued at 13 million dollars in 1996. Copra and citrus are the other exported crops of any significance, while timber accounted for 8 million dollars in 1996, though this figure is likely to be significantly under-reported. sSource: Bank of Mozambique, Ministry of Commerce: Planning Commission, January 1995; and Bank of Mozambique data for 1996. See detailed data in the Appendix Tables. The figure for cashew nuts includes both processed ($12 million in 1996) and raw ($31 million in 1996). 2  240 200 - OOther 160 / O~~~~~~ Petroleum US$ 160 - i Sugar mill. 120 - 0 Cotton 80 m - O Cashew Nuts 0 1989 1991 1993 1995 Figure 2. Commodity exports, 1989-966 5. On the policy side, Mozambique has made considerable progress towards the market orientation that the government has espoused since 1992. Although inflation rates fluctuated between 33 and 63 percent from 1990 to 1995, the effects of monetary tightening were felt in 1996, and the inflation rate dropped to 17 percent by the end of the year. Borrowers' interest rates were controlled until 1994, and they tended to follow the inflation rate, so that the real interest rate varied between -8 percent and 3 percent between 1990 and 1994. Real interest rates rose with the liberalization, and for small borrowers, owing to the greater risk involved, were sometimes over 100 percent in real terms. Real interest rates declined during 1996, and prime borrowers faced (nominal) interest rates of 25 percent. 6. The official exchange rate was heavily overvalued in the early 1990s, but the freeing of currency movements and successive devaluations resulted by the mid-I 990s in a negligible official-unofficial rate differential. As is shown in Figure 2, there was a substantial real depreciation between 1990 and 1993, though with a slight appreciation again by 1996. Taking into account the recent improvements on the inflation front and the real depreciation of the exchange rate, the macroeconomic scene is set for further growth in the agriculture sector. 6Source: Bank of Mozambique, Ministry of Commerce: Planning Commission, January 1995, and Republica de Mocambique (1997). See detailed data in the Appendix Tables. The category "Other" includes tea, copra, citrus, coal, and miscellaneous items (timber, tires, copra oil, manufactures, other minerals, other fishery products). The figure for cashew nuts includes both processed ($12 million in 1996) and raw ($31 million in 1996). 3  100 t Real e.r. 9o index (US$ per 80 local currency 70- unit) 60 - 50 1990 1992 1994 1996 Figure 3. The real exchange rate, 1990-96' 7. As far as product markets are concerned, the state-controlled system with fixed prices run by AGRICOM was dismantled, and AGRICOM was replaced by the ICM (Cereals Institute of Mozambique). While the lCM has a broad mandate of agricultural price stabilization., it has a very limited budget and is functioning as a regular wholesaler. The government sets minimum prices annually, often after the growing season has already started. Given the fact that inflation was high and unpredictable during the early 1990s, these prices rarely corresponded to the observed market prices, but the government lacks the funds to defend the floor prices. 8. There remain certain constraints in the input markets. There is a minimum wage but it is rarely enforced in the agricultural sector and it is infrequently adjusted. so that its effects on factor choices are negligible. Capital markets are problematic for many farmers on account of the high effective real interest rates they are required to pay. Furthermore, land cannot be used as collateral because the land law forbids the sale of land, and there is insecurity for many smallholders in the face of land titling activity by outside agencies, firms and farmers. 9. The government has divested itself of practically all of its state farms and agro- processing facilities, the most notable of which was the cashew processor Caju de Mo,ambique. 10. Import tariffs, according to the new regime of November 1, 1996, are low, between zero and 35 percent. Export tariffs are zero but for the case of raw cashew nuts where the tariff was reduced from 20 percent in the 1995/6 season to 14 percent in the 1996/7 season. There is a sales tax (imposto de circulaqdo) of between 5 and 21 percent which impedes trade to the extent to which it is enforced. A more serious problem in the trading area, however, is the difficulty of entry into wholesaling and retailing, owing to the stringent legal requirements and to some misapplication of the rules by local officials. H . Overall, taking into account the macroeconomic environment, the output and input markets and the marketing, trade and tax regimes, Mozambique has in recent years made substantial progress towards bringing about market-based growth. Its agricultural sector is well placed for expansion. 7Sources: see the Appendix Tables of Volume II (Main Report) of this Memorandum. 4  B. Major Findings of the Memorandum 12. This memorandum has reviewed Mozambique's agricultural performance in some detail. Institutional and economic factors were analyzed in order to explain the successes and failures of past policy. Some key conclusions, which form the basis for subsequent recommendations on sectoral development policy, are set forth below. (a) Raising smallholder agriculturalproduction is an effective way of addressing poverty 13. Poverty may be defined by reference to a poverty line, the level of which is necessarily arbitrary. A line frequently used in the African context is $1 equivalent per capita family income per day. The (unenforced) minimum wage in Mozambique is about $0.50/day; few rural employees receive wages higher than this. By the standard of$1/capita/day, the vast majority of Mozambicans, rural and urban, would be classified as "poor". 14. An alternative definition of poverty is the lack of a specified combination of services whichi our society has come to consider as basic necessities. This basket of services often includes access to clean water, access to primary education, access to medical care, and access to enough food calories for health and comfort (which in turn presumes a certain level of income). By any reasonable standard incorporating arbitrarily defined levels of the latter variables, the vast majority of Mozambicans are poor. Roughly three-quarters of the population lacks access to safe water. 42 percent of men and 77 percent of women (rural and urban) are illiterate. Chronic malnutrition affects 27 percent of children under the age of five.9 About 60 percent of the population. rural and urban, lacks access to health services.10 Infant mortality (146 per thousand live births) and under five mortality (282 per thousand live births)1 I are much higher than the sub-Saharan African averages of 99 and 172. Maternal mortality ( ,100 per hundred thousand live births) is one-third higher than the average for sub-Saharan Africa. Reflecting the lack of access - urban and rural - to medical care, the average life expectancy is 46 years.'3 15. The analysis has demonstrated that raising the farming output of smallholders is an effective way of reducing poverty. The argument is developed in three stages: smallholders constitute the vast majority of Mozambican society; smallholders are among the poorest people in the country; and raising smallholder production would reduce poverty directly, by raising incomes, and indirectly, by reducing the isolation of smallholder families. 8 Multiple Indicator Cluster Survey, Table 8, p. 25. 9In the sense of having a weight-for-age Z-score less than -2.0 (Multiple Indicator Cluster Survey (1996), quoted in Desai (1996), Table XV). No rural/urban breakdown is available. Data refer to 1995. '