Challenges and Opportunities for Efficient Land Use in Mozambique: Taxes, Financing, and Infrastructure
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Challenges and Opportunities for Efficient Land Use in Mozambique: Taxes, Financing, and Infrastructure Amanda de Albuquerque Andrew Hobbs October 2016 A CPI Report October 2016 Challenges and Opportunities for Efficient Land Use in Mozambique Acknowledgements The authors would like to thank the New Climate Economy for supporting the writing of this report. Also, we thank Natasha Grist, Juliano Assunção, Angela Falconer and João Morgado for providing in-kind support and helpful advice. Descriptors Sector Region Southern Africa Keywords Mozambique, Land Use, Taxes, Financing, Infrastructure, Natural Resources Management Related CPI Business/Economic Landscape: Mozambique Reports Physical Landscape: Mozambique Fiscal Landscape: Mozambique Contact Amanda de Albuquerque [email protected] Andrew Hobbs [email protected] About CPI Climate Policy Initiative works to improve the most important energy and land use policies around the world, with a particular focus on finance. An independent organization supported in part by a grant from the Open Society Foundations, CPI works in places that provide the most potential for policy impact including Brazil, China, Europe, India, Indonesia, and the United States. Our work helps nations grow while addressing increasingly scarce resources and climate risk. This is a complex challenge in which policy plays a crucial role. Copyright © 2016 Climate Policy Initiative www.climatepolicyinitiative.org All rights reserved. CPI welcomes the use of its material for noncommercial purposes, such as policy discussions or educational activities, under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. For commercial use, please contact [email protected]. A CPI Report 2 October 2016 Challenges and Opportunities for Efficient Land Use in Mozambique Executive Summary Mozambique has immense agricultural potential. 2. Develop public financial incentives and public Unfortunately, despite favorable weather and soil private partnerships (PPPs) capable of providing conditions, land resources, and an available workforce, the tools to mitigate risk and allow investment. the country remains a net food importer with rates 3. Prioritize key infrastructure projects needed to of agricultural productivity well below international stimulate investment in agriculture, including standards. Further, Mozambique is among the world’s energy and irrigation systems. most vulnerable countries in light of climate change:1 the use of drought resistant seeds and irrigation are 4. Increase revenue-sharing mechanisms to incentiv- rare, the majority of rural producers are focused on ize natural resource protection. subsistence, and a dry year can lead to serious food security challenges. 1. Simplify government tax and fee Financing for measures that reduce risk and increase administration productivity, such as improved seeds and irrigation, could help address some of these issues. However, ensuring adequate food and water into the future also Tax rates for the agricultural sector depends on the promotion of the long-term, productive potential of natural resources and the maintenance of are competitive, but bureaucratic their environmental functions. By implementing efficient and sustainable land use, Mozambique can align natural delays impose high costs on trade resources protection, reforestation, and avoidance of degradation with increased agricultural yields and food security. The government implemented important reforms in the last decade, with a major one being the creation of While the government, private sector, and civil society the Revenue Authority in 2006. However, tax system in Mozambique have made progress toward solving administration is still the primary problem affecting tax some of the institutional and operational challenges compliance by businesses. Concerns about arbitrary of investing in these types of measures—in particular practices by tax officials, difficulty in accessing though the Comprehensive Africa Agricultural information on the tax system, and lack of online Development Program (CAADP) and government taxpayer services are larger concerns than the tax rates institutions like CEPGRI, IPEME, IPEX, CPI, IIAM, and themselves. Since delays and tax system complexity CEPPAG—many gaps remain. impose significant costs on businesses operating in Within this institutional and operational context, the agriculture sector, they discourage investment, researchers at Climate Policy Initiative—as part of including investment in productivity-increasing the New Climate Economy project—examined the technology or long-term sustainability measures. challenges and opportunities for investing in agriculture and natural resources management, with the goal Income tax breaks are available and VAT is lower for of laying out next steps toward more efficient and agriculture compared to other sectors, although issues sustainable land use in Mozambique. accessing these benefits impose high costs for many Focusing on low-cost policy modifications, we found companies. four ways to improve agricultural productivity and Agriculture has a special income tax that is considerably natural resource management: lower than for other sectors (10%, while the general rate 1. Simplify government tax and fee administra- is 32%). The rate can be even lower for big producers tion, with an aim to reduce the costs imposed by when they can access the Code of Fiscal Benefits. bureaucratic time-delays. Moreover, there are opportunities for VAT exemption in the agricultural sector. However, the VAT system is not achieving its potential in terms of reducing tax 1 Mozambique ranks 31st out of 192 countries regarding the Food Score of the barriers to investment in the agriculture sector. VAT Notre Dame University Global Adaptation Index (ND-GAIN), which captures refund processing can be very slow, which is especially a country’s vulnerability to climate change, in terms of food production, food demand, nutrition, and rural population. costly for exporting companies or those investing in A CPI Report 3 October 2016 Challenges and Opportunities for Efficient Land Use in Mozambique capital goods. VAT registration rules also add a barrier productivity, data from the 2010 Agricultural Census for enterprises interested in doing business with small show that only 2.3% of small farms borrowed money, producers. while 7.0% of medium and 15.2% of large farms did so. This may be explained by several factors: Some port fees are high, but the more important trade • High interest rates of over 20% for agricultural issue is the time spent to conclude a transaction. producers are standard. This is unsurprising in a context where collateral is unavailable due to non- Imports of agricultural inputs still face many challenges. transferability of land, currency risk is substantial, For example, poor infrastructure and the restriction and risk management tools are lacking. However, on re-exports has led to low volumes of fertilizers high interest rates mean investment is costly for getting into the country, which has translated to high those who need a loan to increase production, costs for fertilizers for small producers. Businesses impeding improvements in agricultural productivity. seeking to invest in export-oriented agribusinesses also face challenges including a lack of convenient • Low levels of financial literacy lead to few warehousing, inability to support larger ships, unusual transactions between traditional financial requirements as the Pre-Shipment Inspection, and the institutions and small producers. Limited rule of obligating every ship to pay a scanning fee, even management skills and financial literacy mean if it is not scanned. These issues can lead to significant that production records are generally poor or border delays, which are costly in themselves and can nonexistent, so evaluating the risk associated with impose further costs if perishable agricultural goods an individual farmer is difficult. spoil. Streamlining export and import processes have • Banks are often physically absent in rural areas, the potential to make trade—both importing inputs and and there is a lack of other financial tools, such as exporting products - more feasible for farmers. insurance instruments adapted to agricultural risks Overall, we find that administrative delays in import- as droughts, floods, and infestations. export and tax processes are likely more detrimental Public financial incentives such as rural credit and crop to the agriculture sector than the tax and fee rates insurance are limited in Mozambique, and given very themselves. These type of costs are additionally high commercial rates of credit, investment is often pernicious because the cost on farmers and agricultural simply infeasible given typical farmer risk preferences. businesses do not translate into revenue for the A system of incentives designed to minimize risk government. Streamlining processes in these areas for farmers, perhaps by combination with insurance could go far in increasing investor confidence and against (or repayment conditional upon the absence improving outcomes for farmers. of) extreme weather events could go far in making investment feasible for small farmers. 2. Develop public financial incentives and public private partnerships Public-private partnerships (PPPs) have recently been emphasized as a potential strategy for supporting larger agricultural enterprises that may in turn provide support for contract farmers via supply chain linkages, contract