Saturday, June 18, 2016

Mozambique's Resource Curse

The “resource curse” that has ruined many resource-rich African countries is steadily creeping onto Mozambique, a country which only a couple of years ago was on the threshold of economic powerhouse, but is now teetering on the brink of a major debt crisis that is having serious repercussions on the economy. Before its current problems, Mozambique was earmarked for an economic boom following the discoveries of natural gas. The commodity is anticipated to add $39 billion to the economy over the next 20 years. The country’s natural gas endowment, coupled with its massive coal deposits, were set to transform the previously impoverished nation, and the region. Alas, Mozambique now seems headed on the path taken by fellow African countries that despite endowment with vast natural resources wallow in poverty. Among these are Angola, Equatorial Guinea, Nigeria and Sudan. According to the 2015 African Report, instead of creating prosperity, resources have too often fostered corruption, undermined inclusive economic growth, armed conflict and indebtedness.

Barely two years after the discovery of vast natural gas explorations and a decade after international creditors wrote off over US$6 billion of loans to the country as part of the Heavily Indebted Poor Countries (HIPC) initiative, the resources-endowed Southern African country is showing alarming signs of plunging back into unserviceable debt.

A disclosure by the government of President Filipe Nyusi previously hidden, government-guaranteed loans exceeding $1 billion (R14,8 billion) to state defence and security companies has precipitated the spectacular fall from economic prominence to a debt crisis. It is believed this is only a tip of the iceberg amid indications the debt could rise to around $2,35 billion with further revelations. It has emerged loans to state or parastatal companies were secretly guaranteed in 2013 and 2014 by the previous government of Armando Guebuza, who presided over the country for a decade until Nyusi assumed the reins in 2015. The country’s public debt has reached frightening levels of $11,64 billion, of which $9,89 billion dollars is foreign debt. Mozambique’s gross domestic product is put at $17 billion.

Among the beneficiaries were Mozambique Tuna Company, which secured $850 million, apparently from Credit Suisse for the purchase of patrol boats. It is said the prices of the vessels were inflated. Proindicus, which provides maritime security in the Rovuma basin, borrowed $622 million, also from Credit Suisse and the Russian bank VTB.Mozambique Asset Management (MAM), provide maritime repair and maintenance, borrowed $535 million also from VTB.

Servicing the debt is already proving insurmountable to the current administration. Nyusi’s government is contemplating defaulting on the loans completely on the basis they were arranged, in violation of legal debt limits, by an erstwhile administration. The International Monetary Fund is also wary of the economic prospects of Mozambique. The International Monetary Fund (IMF), which has been working with Mozambique to help it repay a previously disclosed debt of US$850 million, has suspended the second installment of a US$282 million loan to the country. Some 14 donors and financial agencies aside the IMF, who used to give direct support to the Mozambican state budget have also interrupted disbursements “until further notice.”

A decrease in foreign aid has worsened a large drop in the world market price of some of Mozambique’s key exports and of foreign direct investment. The result has been a severe shortage of foreign currency, which has seen the Meticals currency, lose double its worth to the South African Rand to 4M/R. According to Peter Fabricius, Institute for Security Studies (ISS) consultant, since most food is imported from South Africa, this will increase food inflation, while the security situation is not rosy either.

“The resource curse, which has ruined so many other African countries, is visiting Mozambique with a vengeance,” said Fabricus.

No comments: