IMF and the Fiscal crisis
+ Not paying bills
+ Secret debt
+ Cash crisis
+ Cost of secret debt
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Shortages and not paying the bills
Health Union APSUSM leader Anselmo Muchave said “there is little to no surgical material, food for patients [or] petrol for ambulances. Workers haven’t received uniforms for years. Something needs to change. Sometimes in the maternity wards you will find women sharing beds. It’s very dangerous,” he said. This is confirmed by the Citizen Health Observatory (OCS). But the ministry responds that it orders enough medicines to keep hospitals supplied, but too many drugs are stolen and sold on the black market. (BBC 21 May, VoA 2 July) But the company supplying plaster for casts for broken bones is refusing to supply, and so doctors are making splits from cardboard. (O Pais 14 July)
The Commercial Institute in central Maputo told its 1000 students not to return to classes Monday 15 July because the school had no water. It has not paid its $1500 per month water bill for some months. Parents are collecting a voluntary 500 meticais ($8) per student to drill a borehole. More than 20 schools in the city of Maputo are without water due to unpaid bills. (Miramar, AIM 16 July, O Pais 15 July)
Deputy Director of the Office to Combat Corruption, Eduardo Sumana, said Thursday (11 July) that he did not have a budget to protect whistle blowers, reducing people coming forward.
The Mozambique airline LAM was banned for several days earlier this month from flying over Zimbabwe because it had not paid overflight fees.
The teacher shortage means many teach extra classes, but they are not being paid the overtime and are striking in some places.
The IMF notes that government payment arrears went from 0.7% of GDP ($130mn) at the end of 2022 to 1.8% ($380 mn) at the end of 2023. In addition, VAT refund arrears were $600mn in April of this year. In April 2023 the government owned $40mn to fuel distributors, but this has been cut to $4mn by March this year.
The secret debt
The $2bn secret debt remains the root of many of Mozambique’s problems. It led to a donor strike, eventually won by the Frelimo government. But it also led to a fiscal crisis as government had to borrow to pay its bills.
In 2012 and 2013 Credit Suisse – then one of the most important Swiss banks – and a Lebanese company Privinvest, convinced the Mozambique government of Armanda Guebuza to take a $2bn loan which involved huge bribes for Mozambicans. The loans were allegedly for coastal protection, but several countries has already turned down the proposal. Mozambique’s leaders argued that as it came from an important Swiss bank, it must be OK.
The loans violated IMF rules and so had to be secret. By 2015 there were rumours on the loans but ambassadors were told it was not true. Senior Mozambicans even lied to IMF head Christine Lagarde. Unfortunately, lying to the head of the IMF just is not done. In April 2016 the Wall Street Journal revealed the whole deal. Christine Lagarde and the ambassadors were personally offended at being lied to, by senior Mozambicans in person. So the IMF agreed to lead a donor strike, withholding all aid which went directly to government (aid to NGOs or projects continued), in particular all-important aid to the state budget. Only the World Bank did not participate.
But government did not cave in and decided to tough it out. In two years (2014-6) the currency was devalued from $1=Mt30 to $1=Mt79. The percentage of the population below the poverty line jumped from 46% to 68% in five years, mainly due to a large jump in food prices. (Food Policy, May 2024) Government bills were not paid. Road repair and other capital expenditures were stopped. Credit to the private sector declined. The economic squeeze was one cause of the civil war in Cabo Delgado, which started in 2017. But the Frelimo government held firm. One by one the donors quietly caved and resumed aid to government. The EU resumed budget support in 2020. Finally, with its tail between its legs, the IMF which was organiser of the donor strike and the last hold-out, crept back in 2022 with a $465mn three-year programme of budget support. At very high cost over a decade, Frelimo won the donor strike. But the IMF’s retaliation last week suggests the struggle continues.
Cash crisis
In the decade since the secret debt crisis, new foreign lending has been sharply reduced, and government has been forced to borrow locally. Government foreign debt has remained steady at about $10bn, but in five years government domestic borrowing has doubled. Mozambique’s three largest foreign creditors, holding half the foreign debt, are the World Bank ($3bn), China ($1.5bn) and African Development Fund ($0.9bn).
Domestic interest rates are very high. Inflation is now down to 3% but the interest rates on treasury bonds are 18%. Government interest payments on domestic debt has jumped from $375mn in 2022 to $645mn this year.
This has seriously hit credit to the economy. From 2008 to 2016 credit from banks to the domestic private sector increased substantially, but it has fallen since. Bank credit to the private sector fell from $4.5bn in May 2023, to $4.1bn in April this year – and is predicted to keep falling. And interest rates are high – in April the average interest rate on new loans for companies was 22.2%, reaching 24.7% for consumption and 23.2% for housing. Since the beginning of the year Bank of Mozambique has reduced the prime rate from 24.1% to 21.2%, with the latest reduction on 1 July. But this is still very high for ordinary businesses and curbs economic development, and is one of the main reasons for the IMF’s citing of low non-mining growth.
The cost of the secret debt
Mozambique gained nothing from the secret debt; almost none of the overpriced equipment it bought could be used. For years fishing boats which did not meet EU standards sat rusting in Maputo harbour and inappropriate trimaran patrol boats sat in a nearby carpark. But Mozambique is still liable for some of these debts. Part is in Eurobonds and in 2023 the repayments were $91mn – more than the unpaid social protection spending. (see yesterday)
Other parts of the secret debts are in London courts and mediation. One piece was agreed on 1 July with three banks – BCP of Portugal and two branches of the Russian bank VTB. The principal owed is $648mn and the total debt with contracted interest is $1.4bn. The banks have accepted $220mn, paid this year. The first $125mn was due to be paid 30 June, and the remaining $95m in two instalments, to be paid in August and September. The question is where the government found the money – the IMF had only provided $60mn in budget support. An earlier settlement in October 2023 had Mozambique pay $142mn to Credit Suisse to write off a $522bn debt. Of that, $46mn which was financed by a one-off fine the government collected due to the cancellation of an unspecified LNG exploration project, and the rest was paid with local currency bonds. And at least one London legal case continues.
Meanwhile what is probably the only remaining criminal trial will go ahead this week in New York, according to Bloomberg (15 July). It is against Manuel Chang who was finance minister (2005-10) and, who signed the illegal government guarantees of the debt – in Mozambique, only parliament can guarantee a loan. Chang was arrested 27 December 2018 at Johannesburg Airport on his way to Dubai and held until he was finally extradited to the US in July 2023.
US Department of Justice says that “in reality, the Proindicus, EMATUM and MAM maritime projects were used by defendant Manuel Chang and his co-conspirators to divert portions of the loan proceeds to pay millions in bribes to themselves, other Mozambican government officials and bankers.” They diverted part of the money “to make payments of bribes and commissions, using the US financial system through transactions through bank accounts in the United States, including at least $5mn to the defendant Manuel Chang through the Eastern District of New York”. Chang rejects all accusations. (LUSA 15 July)
When the IMF imposed “shock therapy” on Mozambique 30 years ago, the idea was to rapidly convert communists to capitalists by turning the top people in Frelimo who could control land, mines, and contracts into oligarchs who could use the power to become intermediaries for international companies. And that has clearly happened in Cabo Delgado. But the inevitable has also happened. Frelimo oligarchs and friends have come to win most government contracts, and the IMF has started to worry.
This had been easy to check on because private companies had to name their shareholders in Boletim da República. But there were changes in rules to protect the oligarchs and foreign investors. First was the ability to register public limited companies which do not have to publish their share register. Second it was allowed to register companies in tax havens, notably Mauritius and UAE.
Many countries now require the registration of the “beneficial owner”, who is behind a chain of companies and actually profits from them. The IMF has made a very cautious move to curb the oligarchs it created, by requiring a secret register of beneficial ownership. The beneficial owner will only be published on the web for winners of a contract of over $1mn, excluding defence and security. Those who gain land, mining licences, and so on remain secret. And the IMF notes that “the lack of a beneficial owner definition in the Decree-Law [recently published] may create challenges with the implementation of the Decree.” The law may not do much for transparency, but it will help the incoming president, who will be able to identify and exclude companies linked to current president Filipe Nyusi and his family.
Judges to strike because they claim they are not mere senior technicians
Judges will strike from 9 August, Associação Moçambicana de Juízes (AMJ) First Vice-President Jafete Fremo confirmed to a press conference Monday (15 July). He stressed they are not asking for more money, but only to retain the extra salary they already had been given. According to Fremo, the approval of the Unified Salary Scale (TSU) degraded the statutory status of judges, putting them in a painful situation by equating them with any senior technician, even though they don’t enjoy the same legal treatment – namely that other technicians can take extra jobs to earn more money, but judges cannot, so should have a higher salary. Including them in the TSU questions the dignity and makes their power more fragile, he said. The judicial system is supposed to be independent, but they have to beg funds from government, Fremo added. (Carta de Moçambique, 16 July)
This newsletter is 2nd of 2 parts – in yesterday’s issue
IMF Austerity
+ IMF ensures Moz remains only mineral exporter
+ Schools 16,000 teachers short
+ Strikes against cuts
+ IMF rep admits past IMF errors
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