Introduction
This brief provides an overview of the consequences of the Mozambican Government’s foreign debt excursions over the past five years. The details that have been made public about the scale of this foreign borrowing, the lack of clarity on what it was spent on and the negative consequences for the country’s economy, should provide a cautionary tale to governments on the effects of foreign debt which is out of line with a country’s financial stature and which is not dealt with in a transparent way. Similarly, it should highlight the risks for lenders. The brief is also intended to cast some light on the economic situation in one of South Africa’s neighbouring countries, on the assumption that whatever happens there, will have some effect here in one form or another. In this context, we can also mention our continuing surprise as to how little is known in South Africa on the internal situation of our neighbours.
The facts
The Mozambican debt crisis became public knowledge in April 2016, when it was made known that the Government of Mozambique had borrowed USD 1.4 billion over the period 2012 to 2015 in commercial debt and had not disclosed this to the outside world (including the IMF and World Bank). This hidden debt was apparently intended to fund projects associated with the “megaprojects” in the developing offshore natural gas industry in Mozambique. The amount involved represents about 10 % of Mozambique’s 2015 GDP and is in addition to the USD 850 million which had been borrowed in September 2013, ostensibly to finance a tuna fishing fleet. It later appeared that much of this additional USD 850 million in funding was destined for naval equipment, including military hardware, but that these details had not been volunteered to purchasers of the bonds which were issued to fund the debt. From a variety of news reports on the subject, it appears that there remains a substantial lack of clarity on what this total borrowing of USD 2.25 billion was actually spent on in the end.
The consequences
The IMF and international donors suspended all financial programmes to Mozambique as a result of the revelations and an independent audit has been announced by the Mozambican Government. According to news reports, the debt had been arranged by Credit Suisse, VTB (a Russian bank) and BNP Paribas and the UK, Switzerland and the US authorities have started to look into the role played by these financial institutions.
The World Bank’s update on Mozambique, appropriately entitled Facing Hard Choices, published in December 2016, states that an economic downturn, brought about by low commodity prices, drought and conflict, has been compounded by the fallout from the discovery of these hidden debts.
The World Bank states that:
The level of debt took an explosive path with the addition of the previously undisclosed loans, making Mozambique one of the countries in Africa with the highest debt to GDP ratios. The onerous terms of the loans and the pace of currency depreciation created severe liquidity constraints that are placing Mozambique’s capacity to meet debt service obligations in question. The outlook is uncertain and rests on the outcome of Mozambique’s negotiations with commercial creditors, with complex discussions ahead in 2017. In the meantime, the fiscal outlook is under immense pressure and budget plans face significant uncertainty.
The World Bank points out in its study that the previously undisclosed loans had pushed public debt up to 86 % of GDP at the end 2015 and that by the end of 2016, this debt is forecast to reach 130 % of GDP. This increase is due in part to the depreciation of the local currency (it has depreciated by 45 % against the US Dollar since the start of 2016), but it is also due to the fact that the loans have commercial interest rates and are on amortising schedules with final maturity dates in 2021 (as opposed to concessional terms which generally apply to debt provided to developing economies). The debt service obligations of these loans pushes the cost of debt service well above 40 % of government revenue and grants until 2020. Other basic economic indicators which are mentioned by the World Bank are equally concerning: year-on-year inflation reached 25 % in October 2016, with food price inflation at 40 %, with the heightened depreciation of the currency and the regional drought playing major roles in this regard. The average retail price for a kilogram of maize grain has increased by 92 %, in the twelve months to September 2016.
According to the World Bank’s analysis, Mozambique’s GDP began to contract sharply in the second and third quarters of 2016 and foreign direct investment and exports are projected to fall by 17% and 8 % respectively in 2016. These declines, coupled with falling consumer demand and fiscal and monetary tightening, are contributing to a sharp reduction in GDP growth, which is now forecast at 3.6 % for 2016 (down from 6.6 % in 2015). The sharp deterioration in economic conditions has a serious impact on Mozambican households, especially the poor, and on its small and medium-sized business sector which, along with agriculture, makes up that part of the economy which is not within the realm of the offshore natural gas “megaprojects”. According to the World Bank, these offshore natural gas projects point to a potential recovery in growth to 6.6 % by 2018. The World Bank is encouraged by recent progress with some of the gas megaprojects and an improving outlook for key commodity prices, but “the challenge remains for Mozambique to ensure that future wealth from these sectors is deployed, with transparency, to spur growth in the non-megaproject economy and lift the poor to prosperity.”.
Whilst one would want to share the World Bank’s optimism, the slow development of these gas projects to date and the logistical difficulties which have negatively affected progress in the country’s coal projects, along with the simultaneous dip in world coal prices, should seriously temper anyone’s hope in this regard. Another recent World Bank study, published in October 2016, provides further confirmation of the severity of the economic and social situation in the country. This study, entitled Accelerating Poverty Reduction on Mozambique: Challenges and Opportunities, points out that although the economy grew by an average of 7.9 % per year from 1993 to 2014, Mozambique has struggled to translate this strong growth into poverty reduction and inequality has actually increased over this period and that among the poor, the illiteracy rate actually increased from 67.6 % to 69.2 % over the period 1997 to 2009.
Conclusion
Mozambique is a very poor country with a per capita GDP of USD 420 in 2016. Until recently, it had very good growth prospects, with the IMF projecting a growth rate of over 10% per year in dollar terms up to 2021. These prospects have now been jeopardised by irresponsible and unaccounted for foreign borrowing, with consequent distress for the majority of the 28 million Mozambicans. Migration pressure on our eastern frontier will increase.
Anton van Dalsen
Legal Counsellor
anton@hsf.org.za
