20 July 2017

Mozambique: Thumbs Down From IMF

Photo: World Bank
(File photo).

The IMF mission which left Mozambique yesterday rejected what it had been offered by the government. The Kroll report on secret debt with its lack of "critical information" is again rejected. And the IMF made harsh demands for tax rises, spending cuts, no new investment and action on state companies. The IMF statement pointedly said "this mission will not result in a Board discussion," which means no new IMF programme this year and no resumption of aid which has been cut off.

The 10-19 July mission was headed, as have recent missions, by Michel Lazare, who repeated and strengthened his past demands. He explicitly cited the 24 June press statement on the Kroll report, saying that "critical information gaps remain unaddressed regarding the use of loans proceeds." The government must "take steps to fill the information gaps and to enhance its action plan to strengthen transparency, improve governance, and ensure accountability."

Clearly annoyed that the government had not listened to past statements, Lazare said "the 2018 budget should decisively reduce the fiscal deficit." The government "should focus on:

  • eliminating tax exemptions (including for VAT),
  • containing the expansion of the wage bill, and
  • prioritizing the implementation of only the most critical public investments, while avoiding the further accumulation of arrears."

"Urgent action is also needed to strengthen the financial position of loss-making companies and limit the fiscal risks they represent."

Lazare always stresses wage cuts and attacks state companies. But this package contains new austerity measures, including tax rises and a sharp cut in public investment, which is in part pointed at announcements of non-essential projects such as Xai-Xai airport.

Three new phrases are also important. "Reduce the fiscal deficit" means government cannot continue to spend above its income, in part through domestic borrowing. And "avoiding the further accumulation of arrears" points to the way that the government has been surviving simply by not paying its bills, and seems unable to even provide an accounting of how much it owes. Similarly "fiscal risks" refers to the huge debts of some state companies, which also remain unclear.

The demands for further austerity were expressed in normal IMF jargon: "Macroeconomic policy discussions centered on the urgent need to further consolidate public finances. The team emphasized that a strong commitment to fiscal adjustment is an essential element to ensure policy sustainability, foster a decline in inflation and interest rates, limit further increases in public debt, while at the same time facilitate debt restructuring." Unpacking this, the phrases "consolidate public finances" and "fiscal adjustment" mean spend less. "Limit further increases in public debt" means the government cannot continue with the rapid expansion of local, domestic borrowing.

But he adds that "protecting critical social programs and reinforcing the social safety net should cushion the impact of these measures on the most vulnerable segments of the population."

Meanwhile, Lazare stresses that Mozambique's overall economic outlook "remains challenging" and that any increase in growth this year will be entirely due to an increase in the export price of coal. Virtually the only praise in the statement was that "the government took important steps by removing wheat and fuel subsidies and reinstating the old automatic fuel price mechanism in March."

Comment:

As well as the normal IMF austerity prescription, Michel Lazare is using his knowledge of Mozambique to go after the rent-seeking and patronage aspects of the Mozambican elite. State companies such as the airline LAM have long provided jobs, contracts and other benefits for the Frelimo elite; extra posts in ministries and provincial administration are for party cadres and push up the wage bill; contracts for supplies and projects provide important revenues.

Opposition parties remain quiet about this because they hope to benefit in the next elections by winning posts that would give them power over such spending. This was underlined by the purchase of 18 Mercedes Benz cars for $3.8 million for members of the parliamentary Standing Commission, initially agreed by members of all three parties and only after public outcry rejected by the opposition parties, but again last week defended by the speaker of parliament, Veronica Macomo. "Members of the Standing Commission are above the level of ministers. Therefore, in legal and procedural terms, we do not see any problem," she said. (AIM En 12 July)

This presents a serious problem for President Filipe Nyusi at the Frelimo Congress in September. The $2 bn secret debt is widely believed to have benefitted some senior Frelimo people, and at lower levels the party has become dependent on patronage, jobs and other benefits paid by the government. The Frelimo leadership has pretended that the delays in the gas projects and the end to budget support and IMF programme would not halt the gravy train because it could borrow domestically and delay paying its bills. Lazare says explicitly this cannot continue. Will the Congress allow at least a few secret debt scapegoats to be identified and accept some belt tightening? Or will it block its ears and continue to pretend that Mozambique can have Mercedes at the top and hand money down the patronage chain?

Japan has suspended new lending because of the secret debt, Japanese Agency for International Cooperation (JICA) representative Yamashita Chigiru told O Pais (20 July). He added "we cannot just suspend loans: we have to create conditions so that the [debt] problem does not repeat itself. It does not make sense for Mozambique to make the same mistake again, given the impact on its population.”

Interest payments were not made on 18 July on the government bonds which replaced the Ematum bonds, the Ministry of Economy and Finance announced on 17 July. Last year, the government nationalised the private loan to Ematum and replaced it with a $726,524,000 10.5% government bond to be repaid in 2023, with interest paid twice a year. The statement said: "As mentioned by H.E. the Minister of Economy and Finance, during the investor presentation in London on 25 October 2016, and as reiterated in the Ministry’s communiques dated 14 November 2016 and 16 January 2017, the challenging macroeconomic and fiscal situation of the Republic has severely affected the country’s public finances.

The resulting debt payment capacity of the Republic remains extremely limited in 2017, and does not allow the Republic room to make the scheduled interest payment on the Notes. The Government is committed to finding a consensual and collaborative resolution to the current financial crisis through dialogue with the holders of its direct and guaranteed external commercial obligations. It will be critical that any solution is based upon a realistic appraisal of the Republic’s capacity to pay."

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