March Economic Digest: Mozambique

UNCLAS SECTION 01 OF 03 MAPUTO 000460

SIPDIS

SIPDIS

AF/S FOR HTREGER AND JMALONEY
JOHANNESBURG FSC FOR RDONOVAN
JOHANNESBURG TDA FOR DSHUSTER
USDOC FOR RTELCHIN
MCC FOR SGAULL
USAID FOR AA/AFR AND AFR/SA

E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD MZ
SUBJECT: March Economic Digest: Mozambique


MAPUTO 00000460 001.2 OF 003



1. This is a brief summary of significant economic
developments in Mozambique during March 2006. We provide it
as a supplement to our other reporting. The items discussed
are:

-- Moma Titanium Reserves 40% Higher Than Expected

-- IFC Purchases 5 Percent of Gas Project

-- IMF Gives Positive Review of GRM's Tax Policy

-- GRM Narrowly Missed 2005 Revenue Collection Target

-- USAID/GRM Announce Tourism Development Project -
"Development of Tourism in the Northern Arch"

-- Port Concessionaire and Railway Parastatal in Dispute

-- Debtor Companies Given Additional Time to Pay
Overdue Social Security Contributions

-- Fifty Percent of Exports go to South Africa

Moma Titanium Reserves 40% Higher Than Expected
-------------- ---


2. Kenmare Resources, owner of the Moma Titanium Minerals
Mine in the northern province of Nampula, announced that
exploratory drilling has found much more titanium ore than
expected. Kenmare now expects to recover 101 million tons
of ilmenite, a significant increase over the earlier
estimate of 72 million tons. Construction on the mine is
also ahead of schedule, now 81% complete, and should be
finished before the end of this year. Kenmare expects to
produce at least 700,000 tons of ilmenite, 60,000 tons of
zircon and 17,000 tons of rutile each year for at least 20
years. The mine is expected to employ over 400 employees
and create around 1500 indirect jobs. Once operational, the
mine is projected to contribute up to 2.4 percent per year
to Mozambique's GDP.

IFC Purchases 5 Percent of Gas Project
--------------


3. IFC, the private sector financing arm of the World Bank,
signed a purchase agreement with the Mozambican Hydrocarbon
Company (CMH) on March 27. Under the terms of this
agreement, IFC will now own five per cent of CMH's shares in
the Pande/Temane Natural Gas Project in the southern
province of Inhambane. The South African petrochemical
company Sasol will still own 70% percent of the Pande/Temane
project, with the remaining 30% owned by CMH (25%) and the
IFC (5%). The agreement took effect as of April 1, 2006.
Current gas production from the project is approximately 91
mega joules and Sasol representatives state they look
forward to a rapid increase in gas production over the next
few years. If increased production is realized, Sasol has
expansion plans that will result in a significant increase
in the amount of natural gas available to the Mozambican
market.

IMF Reviews Tax Policy at GRM's Request
--------------


4. The IMF conducted a review of Mozambique's tax policy,
at the request of the Government of Mozambique. The IMF
examined the structure and design of the tax system, with
administration issues only of peripheral consideration.
After completing its review, the IMF concluded that the
GRM's tax policy is overall sound, with only small
deficiencies. The review highlighted some problem areas: a)
absolute tax revenues are going up, but are declining as a
percentage of GDP; b) there are overly generous terms to
mega projects that are essentially unrestricted by time and
c) administration of the system. Based on what IMF
officials called "precarious" data, the GRM has the
potential to collect 22 percent of GDP. However, currently
it collects 11 percent of GDP in taxes, with royalties and
fees boosting total revenue to 14 percent. Looking forward,
there are two significant tax collection gaps that will need
to be filled - the missing portion of potential collections
and the projected fall in customs revenue that will result

MAPUTO 00000460 002.2 OF 003


from the SADC free trade agreement's required reduction in
tariffs.

GRM Narrowly Missed 2005 Revenue Collection Target
-------------- --------------


5. The GRM declared in March that it missed its 2005
revenue collection target, falling short by 0.4 percent of
GDP. Collected revenue was equivalent to 14.1 percent of
estimated GDP, short of the 14.5 percent goal. Mozambican
officials plan to focus on improving the links between the
tax administration and taxpayers, increasing the number of
tax collection offices and fighting corruption and fraud.
Not all observers found the shortfall upsetting, some
believing the original goal of 14.5 percent unrealistically
ambitious.

USAID/GRM Announce Tourism Development Project -
"Development of Tourism in the Northern Arch"
-------------- --------------
--------------


6. On March 3, USAID officials and Tourism Minister
Fernando Sumbana announced the USAID sponsored tourism
project - "Development of Tourism in the Northern Arch".
The project focuses on promotion of tourism in the northern
region, specifically the provinces of Nampula, Niassa and
Cable Delgado and will be implemented over the next three
years. USAID is contributing USD 5.5 million to the
project, which will consist of three prongs. The first
prong focuses on attracting tourists through rehabilitation
of Ibo Island and other endeavors, while the second prong
focuses on attracting investors. The third prong is
dedicated to preserving the environment through creation and
support of a Pemba Bay Conservancy and a National Park on
Lake Niassa. USAID will have a lead role in project
implementation.

Port Concessionaire and Railway Parastatal in Dispute
-------------- --------------


7. Rui Fonseca, Chairman of the parastatal Mozambican Ports
and Railway Company (CFM),made several public statements in
March accusing the Maputo Port Development Company (MPDC) of
failing to honor its contracts and causing huge losses to
CFM. Under the concession agreement, MPDC is supposed to
pay an annual amount fixed to the US Consumer Price Index,
plus a percentage of pre-tax gross income. MPDC officials
say that they have not paid the fixed amount to CFM for the
last two years because CFM is also in violation of the
concession agreement. (Note: This amount is USD 10 million.
End note.) According to MPDC, the concession agreement
required CFM to rehabilitate the railway line connecting the
Port of Maputo with Ressano Garcia, the closest border
crossing to South Africa. CFM has not yet been able to
rehabilitate this line, recently canceling a concession with
the South African firm SpoorNet after years of inactivity.
Prior to independence, the Port of Maputo handled over 15
million tons of product per year. The Port currently
handles approximately 6 million tons per year, and MPDC
officials state that rehabilitation of the rail line is
critical to reaching pre-independence levels.

Debtor Companies Given Additional Time to Pay Overdue Social
Security Contributions
-------------- --------------


8. The GRM announced on March 20 that companies would be
given an additional three months to pay overdue social
security contributions. The current amount outstanding is
estimated to be over USD 4.8 million. Collection of
contributions owed to the National Social Security Institute
(INSS) has been an ongoing struggle, with many companies
deducting the amounts for worker paychecks but failing to
transmit the money to the INSS. In August of 2005, Minister
of Labor Helena Taipo fired the INSS General Director and
many INSS employees in an effort to refocus the entity and
fight corruption.

Fifty Percent of Exports go to South Africa
--------------


MAPUTO 00000460 003.2 OF 003



9. Sergio Macamo, economic advisor to Mozambique's Ministry
of Industry and Commerce, speaking at an investment seminar
in neighboring Nelspruit, South Africa, on March 14,
emphasized South Africa's role as a major economic partner
with Mozambique. According to Macamo, not only do fifty
percent of Mozambique's exports go to South Africa, but
fifty percent of its imports are South African as well.
Macamo stated that Mozambican companies were looking for
partners in glass, textile and rubber ventures, and that
Mozambique offered vast opportunities for investors in mega-
projects such as coal mining, bio-diesel manufacturing,
aluminum and refurbishment of railway lines.

La Lime