Manufacturing and SME Growth Barriers in Mozambique
Mozambique 2025 - Manufacturing and SME Growth Barriers: Low Contribution, High Costs, and Linkage Challenges
Mozambique's pursuit of structural transformation is severely constrained by the persistent weakness of its Manufacturing sector and the numerous barriers inhibiting the growth of Small and Medium Enterprises (SMEs). Despite historical growth fueled by large capital investments, the manufacturing sector's contribution to Gross Domestic Product (GDP) remains low. While the government uses mechanisms like Special Economic Zones (SEZs) to drive industrialization and job creation, pervasive challenges related to costs, finance, and linkages impede widespread success.
Manufacturing's Low Contribution and Extractive Dependencies
The manufacturing sector, often regarded as the engine for structural transformation, holds a notably weak share of Mozambique's GDP.
Low GDP Share: Manufacturing value-added has historically fluctuated, recorded at just below 14%, and contributing as low as 7% of GDP in certain accounts. This low participation means that manufacturing employs only a small fraction of the workforce, estimated at only 2% of total employment (or roughly a quarter million people).
Historical Context: The growth of industrial output in the past was largely driven by large foreign investments, such as the US$2.4 billion investment in the Mozal aluminum smelter in the late 1990s, which increased the industrial share of output to 19%. However, this capital-intensive growth model has not translated into sufficient job creation.
Risk of Dutch Disease: The exponential growth of the extractive industries, particularly LNG and gas-related production and investment, creates macroeconomic risks for the manufacturing sector. The relative appreciation of the Metical stemming from gas activity is beginning to hurt the competitiveness of non-gas sectors, notably manufacturing. Furthermore, the expanding extractive industries pose risks to the international competitiveness of other sectors in the economy.
Critical Barriers Inhibiting SME Growth
Skills Deficits: Firms in Mozambique generally lack the skills to meet the standards and quantities required by megaprojects. This weakness exists across all levels, including general managerial capacity and technical skills.
Weak Capacity: The weak capacity of local SMEs, including low financial capacity and skill levels, is a major challenge to fostering local content.SMEs are vital to the national economy, constituting 98.7% of all active businesses and providing the majority of employment opportunities. However, these enterprises face severe operational and financial constraints that limit their ability to grow, integrate into modern value chains, and create formal jobs.
A. High Cost of Energy and Poor Infrastructure
The high cost and unreliability of energy are major obstacles to industrialization and SME competitiveness:
Energy Cost Constraint: The high cost of energy continues to limit industrialisation in Mozambique.
B. Access to Finance and Credit Constraints
SMEs face immense financial hurdles, compounded by market structure and high interest rates:
Credit Unaffordability: Commercial banks charge high interest rates, making credit unaffordable for most local businesses and SMEs. This high cost of credit is identified as a constraint for SMEs participating in extractive value chains.
Financing Gap: The financing gap for Micro, Small, and Medium Enterprises (MSMEs) was estimated to be equivalent to 10% of GDP in 2017.
Crowding Out: The increasing public domestic debt crowds out local enterprises and strangles the national economy. Consequently, Mozambique ranks poorly globally for obtaining credit.
Skills Deficits: Firms in Mozambique generally lack the skills to meet the standards and quantities required by megaprojects. This weakness exists across all levels, including general managerial capacity and technical skills.Weak Capacity: The weak capacity of local SMEs, including low financial capacity and skill levels, is a major challenge to fostering local content.
C. Lack of Skills and Weak Linkages
SMEs struggle to meet the strict standards and scale required by large international projects:
Skills Deficits: Firms in Mozambique generally lack the skills to meet the standards and quantities required by megaprojects. This weakness exists across all levels, including general managerial capacity and technical skills.Weak Capacity: The weak capacity of local SMEs, including low financial capacity and skill levels, is a major challenge to fostering local content.
Limited Linkages: The current reliance on capital-intensive mega-projects has resulted in limited linkages to the broader economy. The contribution of MSMEs to the Mozambican economy is relatively low because these large projects often operate with little connection to the national economy.
III. Special Economic Zones (SEZs) and the Nacala Corridor
The government uses Special Economic Zones (SEZs) as a policy measure to provide preferential treatment, streamlined procedures, and fiscal incentives aimed at attracting FDI and stimulating job creation and exports.
The Nacala Special Economic Zone (ZEEN)
The Nacala SEZ (ZEEN) is the oldest and largest SEZ in Mozambique. Its strategic location near the deep-water Port of Nacala, linked by rail and road networks, makes it ideal for export-oriented manufacturing, logistics, industry, and agro-processing.Investment and Job Targets: As of recent data, 194 projects have been authorized in the Nacala SEZ. These approved investments, totaling approximately US$2.445 billion, are projected to create over 25,000 jobs for nationals.I
ndirect Job Potential: While the figure of 25,000 jobs is the direct projection for ZEEN, massive projects like the LNG developments in Cabo Delgado (which the Nacala corridor supports) were estimated to create an additional 50,000 indirect jobs in small-scale activities during the construction phase.Role in Regional Trade: The Nacala SEZ leverages the corridor's position as a gateway for trade with landlocked neighbors like Malawi and Zambia. Strengthening these transport corridors and logistics centers is key to boosting future agriculture and industrial output along the Nacala corridor.
Policy Imperative: Creating Jobs at Scale
The structural constraints in manufacturing and SME growth are directly linked to the country's urgent need to create jobs for its rapidly expanding labor force. Up to 500,000 young people are expected to join the labor force every year until 2050.
The challenge for 2025 and beyond is to transition the high-risk, capital-intensive FDI into sustainable, labor-intensive growth. This requires focusing policy on removing the main constraints to job creation and strengthening value chains. The government should expand the demand for formal wage employment in sectors beyond extractives, such as food manufacturing and tourism, to develop better skills and economic opportunities in Mozambique.