The Cost-of-Living Crisis in Mozambique: Poverty Impacts and Possible Policy Responses

Extreme poverty has been rising in Mozambique for the past decade—the analysis in this Development Futures Series Working Paper suggests that this trend has been aggravated by the cost-of-living crisis induced by the onset of the war in Ukraine in early 2022. The authors of this working paper estimate that, compared to December 2021, 1 million additional Mozambicans lived in extreme poverty as of December 2022 due to the soaring food, energy and transport inflation, with 60% of these individuals being concentrated in urban areas. The analysis underscores the limited mitigation potential of tax measures, such as the reduction in Value Added Tax (VAT) implemented by the Mozambican government in December 2022. The analysis finds that alternative policies, such as cash transfers, have nearly three times greater mitigation potential. While this is a national analysis, this paper includes important policy implications for countries with significant shares of subsistence farmers, economies that have implemented or considered implementing a VAT reduction to mitigate income or consumption shocks, and countries facing compound shocks through the cost-of-living crisis, extreme weather events and armed conflict.