Mozambique economy affected by liquidity crisis

13 March 2017

A liquidity crisis, fueled by high public debt and the freezing of foreign aid, will continue to destabilise the economy of Mozambique, which this year and next is expected to grow at historically low rates, according to the Economist Intelligence Unit (EIU) in its latest report on the country.

The authors of the document say that public debt may – “possibly” – be restructured, similarly to the first restructuring that took place on a loan of US$850 million taken on by tuna company Ematum, but capital flows, including foreign direct investment will take a few years until they reach levels seen in the recent past.

The government, for its part, will seek to “tighten” fiscal and monetary policy, in an attempt to restore the relationship with the International Monetary Fund (IMF) and to respond to the liquidity problem, with the EIU saying that execution should have little impact because of the opposition that will be raised both by politicians and voters.

The real growth rate of the country’s gross domestic product is expected to remain low in 2017/2018 compared with previous periods, due to weak domestic demand and a reduction in investment, which should recover in the coming years, as business confidence improves.

The report, to which Macauhub had access, said that completion later this month of the international independent audit of undisclosed foreign loans taken on by the previous government should contribute to restoring good relations with international donors.

“However, we anticipate that direct aid to the state budget will be replaced by aid to specific programmes, in view of the doubts raised by donors about the Mozambican government’s ability to manage its own accounts,” the document said.

Because of doubts raised by previous Western donor countries, the government of Mozambique will seek to deepen its relationship with Asian countries – China in particular which is currently one of the country’s main creditors – and those that import coal and natural gas – including India and Thailand, whose state companies have been investing in the country.

“Despite the government’s efforts, the existing political instability in the country, the lower growth of China’s economy and an oil and natural gas market with excess supply will lead Asian countries with no great desire to invest in Mozambique,” adds the report.

The economy of Mozambique, after reaching a 15-year low in 2016, with growth of 3.6%, is expected to recover slightly to 4.2% this year, supported almost exclusively by mining operations for coal, whose prices have been rising in international markets.

After 2017, the country’s economy should return to a path of higher growth, with the EIU estimating that in 2018 it will grow at a rate of 4.6%, before rising to over 5% between 2019 and 2021. (macauhub)