Reassessing Tax Incentives: Mozambique's Path to Sustainable Economic Growth

The IMF's analysis of Mozambique's tax policy reveals significant fiscal sacrifices through generous tax incentives with unclear economic benefits, highlighting inefficiencies and a lack of strategic alignment. The report calls for evidence-based, targeted tax policies and improved infrastructure to achieve sustainable growth and fiscal stability.

The International Monetary Fund (IMF), in collaboration with the World Bank and other global institutions, has critically examined Mozambique’s tax policy as a tool for industrial development. In a detailed report, researchers revealed the significant fiscal resources Mozambique has dedicated to incentivizing investment and promoting industrial growth. Despite these efforts, the study highlights inefficiencies, a lack of strategic alignment, and unclear benefits from such policies. Over the years, Mozambique has implemented a variety of tax incentives, including tax holidays, reduced tax rates, and customs exemptions, which have collectively resulted in foregone revenues exceeding 2.6% of the country’s GDP. Compared to other sub-Saharan African nations, whose average tax expenditure is 1.8% of GDP, Mozambique’s figures stand out, raising questions about whether these policies have effectively contributed to economic development or exacerbated fiscal challenges.

Generous Incentives with Limited Returns

Mozambique’s tax policy has evolved through various iterations of the Code of Fiscal Benefits (CFB), introduced in 1993 and revised in 2002 and 2009. These frameworks offered substantial incentives such as corporate tax holidays, customs exemptions, and sector-specific benefits targeting agriculture, tourism, and manufacturing. The latest version, CFB 2009, sought to rationalize incentives through stricter eligibility criteria and regular audits. Despite these measures, the effective corporate tax rate for some firms has dropped to 12%, significantly below the statutory rate of 32%. At the same time, corporate tax abuse has emerged as a growing problem, costing Mozambique an estimated 2% of GDP annually. Together, high tax expenditures and rampant abuse have undermined domestic revenue mobilization, even as the government struggles to meet its industrial policy objectives.

Ambitious Industrial Policies Meet Practical Challenges

Mozambique’s industrial policies have been ambitious in scope, aiming to transform the economy through targeted initiatives. Beginning with the Industrial Policy and Strategy (PEI) of 1997, the government introduced measures such as industrial free zones, tax incentives, and public-private partnerships to attract foreign direct investment (FDI) and boost local industries. Recent efforts, including the National Program to Industrialize Mozambique (PRONAI), emphasize value chain development in agriculture and fisheries, job creation, and poverty reduction. However, while these strategies are well-intentioned, they lack the robust evidence-based frameworks needed to deliver sustainable results. Infrastructure deficiencies, such as unreliable electricity and poor transportation networks, continue to hamper business operations, and these structural issues remain more pressing concerns for firms than tax rates.

Structural Shifts in Mozambique’s Business Landscape

Empirical data from World Bank Enterprise Surveys conducted in 2007 and 2018 show significant structural changes in Mozambique’s business landscape. Firms have become more likely to invest in fixed capital and worker training, activities explicitly incentivized by CFB 2009. Small and medium enterprises (SMEs) have narrowed the gap with larger firms in terms of capital investments, reflecting a shift toward greater inclusivity. Businesses have also shown improvements in financial inclusion and productivity, with more firms gaining access to bank accounts and overdraft facilities while reporting higher sales-to-employee ratios. Despite these positive trends, the broad eligibility criteria for tax benefits make it difficult to attribute these improvements solely to the incentives provided under the CFB. Moreover, businesses consistently identify infrastructure and institutional deficiencies as more significant challenges than tax burdens, a finding that underscores the need for more comprehensive development strategies.

Rethinking Tax Policy for Sustainable Growth

The findings of the IMF report point to the urgent need for Mozambique to rethink its approach to tax policy and industrial development. The over-reliance on broad and poorly targeted tax incentives has not only strained fiscal resources but also created opportunities for inefficiencies and rent-seeking behavior. Policymakers must prioritize the design of targeted tax incentives that focus on specific economic objectives, such as fostering innovation, supporting export-oriented industries, and promoting underdeveloped regions. Additionally, better coordination among government ministries and collaboration with institutions like the World Bank can enhance the design and monitoring of tax policies. The lack of recurring, reliable data further hampers efforts to evaluate the effectiveness of tax measures, highlighting the need for improved data collection and transparency.

Balancing Growth and Fiscal Sustainability

Mozambique’s extensive use of tax policy as an industrial tool has led to significant fiscal sacrifices, with limited evidence of corresponding economic benefits. While these policies are well-intentioned, their implementation has often lacked precision, coordination, and accountability. Moving forward, the government must adopt a more strategic, evidence-driven approach to tax policy design. This will involve directing public resources toward initiatives with the highest potential for socioeconomic impact while addressing critical structural issues such as infrastructure and institutional quality. By aligning tax policies with broader industrial and developmental strategies, Mozambique can better balance its aspirations for industrial growth with the pressing need for fiscal and economic sustainability. This recalibration is essential to ensure that tax policy becomes a driver of progress rather than a costly burden on the nation’s resources.