The Cost-of-Living Crisis in Mozambique: Poverty Impacts and Possible Policy Responses
Abstract
Extreme poverty has been increasing in Mozambique for the past decade, exacerbated by the cost-of-living crisis triggered by the war in Ukraine in early 2022. The analysis indicates that approximately 1 million additional Mozambicans fell into extreme poverty by December 2022, with 60% of these individuals residing in urban areas. The study highlights the limited effectiveness of tax measures, such as the reduction in Value Added Tax (VAT) implemented in December 2022, and suggests that alternative policies like cash transfers have nearly three times greater mitigation potential.
Context
The global perspective on the impact of soaring food and energy prices on poverty and vulnerability during the first months of the war in Ukraine is provided by George Gray Molina, Maria Montoya-Aguirre, and Eduardo Ortiz-Juarez. The specific challenges faced by smallholder farmers are detailed in reports by The World Bank and UNCTAD. The World Bank's Fiscal Monitor Database offers insights into VAT reductions in response to the COVID-19 pandemic, while Gentilini and others track global social protection responses to price shocks.
Key Findings
- Poverty Impact: Approximately 1 million additional Mozambicans fell into extreme poverty by December 2022, with 60% in urban areas.
- Inflation: Food, energy, and transport inflation contributed significantly to the rise in poverty.
- Tax Measures: The reduction in VAT implemented in December 2022 had limited effectiveness in mitigating the crisis.
- Alternative Policies: Cash transfers were found to be three times more effective than tax measures in alleviating the crisis.
Potential Mitigation Policy Responses
- VAT Reduction vs. Cash Transfers: The study compares the efficacy and cost of VAT reduction policies and cash transfer schemes of similar cost. It finds that cash transfers have nearly three times greater mitigation potential.
- Expenditure Exposures: The analysis shows that reducing VAT can save households money, but cash transfers are more effective in lifting individuals out of extreme poverty.
Conclusion and Policy Implications
- Policy Recommendations: The study recommends cash transfers as a more effective policy response to mitigate the cost-of-living crisis, especially in countries with significant shares of subsistence farmers and economies that have implemented or considered implementing VAT reductions.
- Implications: The findings are particularly relevant for countries facing compound shocks through the cost-of-living crisis, extreme weather events, and armed conflict.
Figures and Data
- Figure 1: Shows the percentage change in global commodity prices and inflation in Mozambique over the 12 months ending December 2022.
- Figure 2: Illustrates the GDP growth, poverty rates, and income distribution in Mozambique from 2010 to 2023.
- Figure 3-5: Detail the total average monthly household per capita consumption and its components, along with the additional expenditure needed to maintain consumption levels.
- Figure 6-8: Display the number of people living in extreme poverty and vulnerability in urban and rural areas from 2021 to 2022.
- Figure 9-12: Compare the efficacy and cost of VAT reduction policies and cash transfer schemes.
- Appendix Figures: Provide supplementary data on gender-specific impacts and detailed consumption patterns.
This summary provides a comprehensive overview of the cost-of-living crisis in Mozambique, its impact on poverty, and the comparative effectiveness of various policy responses.