Debt woe continues for Mozambique

24 May 2019

The government of Mozambique is battling to bring its debt under control. Public debt as a proportion of GDP reached 110.5% at the end of 2018, up from a low of 37.5% in 2011 thanks to long-running debt relief. However, Maputo is engaging with the IMF and has pledged to put its house in order after the secret debt scandal but it will take a long time for the government to rebuild its shattered reputation. The debt will also make it difficult for Maputo to finance the infrastructural projects that Chinese companies among others hope to develop over the next few years.

The IMF includes Mozambique among six countries in Sub-Saharan Africa that it regards as being in “debt distress”; that is, having already defaulted on loans. Methodologies vary but it is generally considered to be the sixth poorest country in the world. Credit ratings agency Fitch forecasts that the debt-to-GDP ratio will peak at 119% in 2022 due to slower growth and budgetary constraints.

On a more positive note, inflation averaged just 3.52% in 2018 according to the National Statistics Institute. The Bank of Mozambique expects inflation to remain low in the medium term, although this is being achieved by keeping the main bank lending rate at 14.25%, which makes finance expensive for businesses of all sizes. A steady exchange rate has helped to stabilise food prices over the past year but there is likely to be some inflationary pressure from the impact of Cyclone Idai. The stabilisation of the metical also means that the central bank has sufficient foreign currency reserves to cover six months of imports.

The hidden loans have put Mozambique under the international spotlight. Credit Suisse, BNP Paribas and Russia’s VTB lent US$2 billion to three state owned companies – Ematum, Proindicus and Mozambique Asset Management (MAM) – to finance the purchase of tuna fishing boats, a radar surveillance network and patrol boats at inflated prices. The government provided guarantees but hid US$1.157 billion of the loans from the IMF and other international organisations, and some of the money seems to have disappeared ( The IMF halted support after the loans came to light, causing government default and triggering a currency collapse. GDP stood at US$12.33 billion in 2017, so US$2 billion in new debt is a huge amount in the Mozambican context.

The government is in the process of negotiating repayment deals with its creditors, including paying 5% of its expected future LNG revenue to them, up to a maximum of US$500 million.  Maputo announced on 9 May that it had concluded an agreement with VTB relating to the US$535 million loan secured by MAM in 2014. The Minister of Economy and Finance, Adriano Maleiane, said that the agreement would be similar to the deal concluded with Ematum creditors, who have agreed to wait until LNG revenues begin to come on stream before substantial repayments are made.

Corruption allegations surrounding the loans are being investigated by the U.S. Department of Justice. Several arrests have been made in Mozambique, while former finance minister Manuel Chang is to be extradited from South Africa to Mozambique, although Washington had wanted him sent to the US. A former vice-president at Credit Suisse, Detelina Subeva, has now pleaded guilty in the US to a charge of conspiracy to assist in money laundering over her bank’s loan to ProIndicus. The US is seeking the extradition of two other executives at the Swiss bank. Mozambique’s attorney-general has filed a lawsuit in the UK to end Maputo’s sovereign guarantee on the US$622 million Credit Suisse loan.

LNG not a panacea

Given that the government of Mozambique is expected to earn US$95 billion from LNG exports over 25 years, the weight of this debt might not be considered too onerous. In mid-May, the government approved the development of the Eni and Exxon Mobil led Rovuma LNG project that will generate US$46 billion on its own. This should see the final investment decision taken before the end of this year, paving the way for the construction of the liquefaction plant.

However, debt can easily balloon out of control, particularly once it exceeds GDP. In addition, the LNG income is not due to flow into the government’s coffers for several years. Finally, the debt scandal has cast doubt over the government’s ability to manage its finances in an appropriate manner. Promoting a sound fiscal policy is vital if economic growth is to be widely based and not focused too heavily on the export of raw materials. Moreover, the government will not automatically be able to tap its share of LNG revenues, as a fixed portion – yet to be determined – will be paid into a sovereign wealth fund that will finance infrastructure development, economic diversification and poverty reduction.

Doubts over the government’s fiscal capabilities are not restricted to the hidden loans. It was forced to liquidate Maputo-Sul, the company set up to develop and operate the new Maputo-Catembe toll bridge, in February, just three months after the bridge was completed. Although China’s Exim Bank provided 95% of the US$785 million construction costs on a preferential basis, the company’s demise may suggest that the expected project revenues will not cover repayments.

Cyclone Idai

The economy has also been affected by Cyclone Idai, which hit the country in March, killing more than 1,000 people in Southern Africa. The cyclone badly affected agricultural production and disrupted transport, as well as killing more than 1,000 people in Southern Africa. It is also possible that there will be some food inflation, particularly around Beira, because crops covering an estimated 800,000 hectares were destroyed.

Prior to the cyclone, the government had been expected to record a fiscal deficit of 1.5% for 2019 but the rate is now predicted to be a full percentage point higher. GDP was expected to grow by 3.8% this year before the cyclone but that figure has now fallen to 1.8-2.8%. Maputo estimates the reconstruction bill at US$1.5 billion. The World Bank has offered a US$90 million grant to support the government’s disaster risk management and it is hoped that other bilateral and multilateral donors will also make contributions.

Ricardo Velloso, IMF mission chief for Mozambique, said: “While it is still early to precisely assess the macroeconomic effects of Cyclone Idai and reconstruction costs, these will be very significant. The international community will have to continue playing a vital role in assisting Mozambique. In this context, the IMF will consider the authorities’ request for emergency financial assistance under the IMF Rapid Credit Facility.”

In April, the IMF granted the government a preferential loan of US$118.2 million under a Rapid Credit Facility to help it cope with the disaster. The IMF is also in talks with the government over making its finances more resilient to the impact of future natural disasters.

IMF deputy executive director and interim chairman Tao Zhang said: “It is estimated that emergency assistance and reconstruction costs are enormous, making the cyclone the worst and most destructive natural disaster to hit the country.” There will be no repayments on the money for 66 months and no interest will be charged upon the sum.

Relations with the IMF

The secret debts have certainly affected relations between the government and the IMF but the latter praised Maputo’s 2017-18 fiscal policy effort, highlighting the elimination of fuel and wheat price subsidies, and the introduction of mechanisms to adjust power and transport prices. Despite these measures, the overall fiscal deficit remains significant so it is clear that the government needs to do more to balance its books.

One way of achieving this would be to rationalise public employment. In January, Macauhub reported the director of planning and cooperation at the Ministry of State Administration and the Civil Service, Cândida Moiane, as saying that the government could save US$240 million – presumably per year – by eliminating 30,000 “phantom” civil servants. At least some of these employees have already been identified and payments stopped. This has been a common problem in various African states over many years. Salaries are paid for workers who do not turn up, who died years ago or in some cases have simply never existed. There are currently 366,000 state employees in Mozambique.

An IMF team that visited Maputo in March reported: “The mission welcomes cabinet approval of the SOE [state owned enterprise] law regulations and recommends strengthening controls over SOE debt issuance. The new agency envisaged in the SOE Law, once created, should exert strong financial oversight over the entire sector. However, in this area, time is of the essence. The authorities should speed up the preparation and implementation of recovery, restructuring and/or privatization plans of SOEs in distress to limit risks to the budget.”

One area where most external agencies, including the IMF, say that much more progress is needed is in strengthening governance, transparency and accountability. The IMF has also encouraged the government to clear its debts to suppliers in order to strengthen supply chains; and to accelerate private sector-led growth by improving the business climate and removing impediments to private sector investment and employment. There have been reports of suppliers being declared bankrupt because of non-payment of bills by various government bodies. Maputo plans to increase the role of local government in delivering services but it is vital that this process does not fuel yet more debt. (Macauhub/CLBrief)