Mozambique - Defying Debt Trap to Become Africa's South Korea

1 November 2022

Mozambique, during the years 2000 to 2015, had one of the highest rates of economic growth in Sub-Saharan Africa.

This is according to data collected by the World Bank and presented in the multilateral institution's website. This remarkable economic growth during this period was driven by the country's natural resources of arable land, water, energy, mineral resources and newly discovered offshore natural gas.

Mozambique is host to 3 large deep-sea ports and a large pool of labor. The country shares borders with Tanzania, Malawi, Zambia, Zimbabwe, South Africa and Eswatini. Its long Indian Ocean coastline of 2,500 kilometres faces east to Madagascar.

  • Mozambique is one of the countries in Africa considered to be highly indebted with debt to GDP ratios around 100%.
  • Despite this fact, Mozambique has one of the most impressive records of economic growth on the continent largely because of its natural resources.
  • Mozambique is strategically located geographically with a seaport and surrounded by neighbours that are landlocked which means that it is a critical route to international markets.

This geographic location for Mozambique is strategic in the sense that 4 of the 6 countries it shares borders with are landlocked meaning that they need Mozambique to access global trade.

The Africa Development Bank (AfDB) and the World Bank both agree that Mozambique has had an impressive run as far as economic growth is concerned.

The AfDB asserts that, "The onset of the Covid-19 pandemic caused a sudden stop to Mozambique's good economic performance. Real GDP contracted by an estimated 0.5% in 2020, the first decline in 28 years, after growing 2.2% in 2019."

There are few countries that can boast a run of economic growth for that long.

South Korea which is a model for African countries looking to transform their respective economies, went from being a poor agriculture-based economy in 1961 to an advanced-developed country by 1996. This comes up to 35 years.

Mozambique, until the Covid pandemic happened, was just 7 years shy of matching or exceeding the record set by South Korea.

The pandemic undermined the southern African country's economic progress by slowing down critical sectors of economic activity namely tourism, construction, transport, as well as a general decline in the demand for commodity exports. The economy of Mozambique was further undermined by the conflict in the northern province of Cabo Delgado.

Statistics on how many people have been displaced by the conflict vary but they range from 250,000 to 1 million people. At least 850,000 people are estimated to have been dragged below the international poverty line because of the conflict.

  • The World Bank and African Development Bank concur that Mozambique has had a good run, in terms of economic growth and some economists have likened the southern African country to South Korea because of the Asian countries 35 years of consecutive economic growth.
  • Mozambique's economic growth period was for 28 consecutive years. The country experienced a slow down in its economy because of the COVID pandemic.
  • The economy of Mozambique was further undermined by the conflict in its northern region of Cabo Delgado.

In response to the pandemic and the conflict, the monetary authorities of Mozambique reduced interest rates by 250 basis points as reported by the AfDB. This policy stance was meant to ensure that there was liquidity and to mitigate a possible credit crunch. Consistent with other emerging market currencies, the Metical, Mozambique's currency has been depreciating against the US dollar.

The AfDB reports that during the pandemic years, Mozambique experienced a deterioration in the fiscal and external balances. In 2020 Mozambique's fiscal deficit widened to 7% of GDP after nearly balancing its books the previous year with a deficit of 2.7% of GDP.

The current account deficit of Mozambique which measures the difference between what that country imports and what it exports was estimated to reach 30.8% of GDP in 2020, according to the AfDB. This was due to lower export earnings and on average the country maintains at least 7 months of import cover in foreign exchange reserves.

Mozambique's debt currently stands at an estimated US$10.19 billion according to the World Bank. The AfDB notes that this already high level of national debt constrains the national budget.

The elevated levels of debt hamstring the government's ability to stimulate private sector growth from a fiscal standpoint.

  • AFDB reports that in response to the economic crisis, Mozambique reacted by slashing interest rates to stimulate internal demand and the local economy when COVID first struck the country in 2020.
  • According to the World Bank Mozambique's debt stands at US$ 10.19 billion and the AfDB agrees that such high levels of debt constrain its national budget. The elevated levels of debt hamstring the government's ability to stimulate private sector growth from a fiscal standpoint.
  • The AfDB recommended that Mozambique pursue a strategy that is sponsored by donors as opposed to private lenders.

The government of Mozambique for example is failing to do what the AfDB has described as, "... leverage social programs to increase the coverage of vulnerable groups to minimize the short- and medium-term impacts of the pandemic."

The African multilateral institution has recommended that Mozambique solve its problems, pursue a different financing strategy to fund its development. The AfDB recommended that Mozambique pursue a strategy that is sponsored by donors as opposed to private lenders. It must obtain funding in the form of highly concessional loans. These loans that have minimal recourse as opposed to those from private lenders will have a less impact on the budget in terms of crisis.

This suggestion by the AfDB should not be directed to Mozambique alone.

All the countries identified by the IMF as having unsustainable debt levels need to reconsider their development financing options and only obtain and accept funding from donor grants or concessionary loans. Mozambique was one of the few African countries that wisely elected to participate in the Debt Service Suspension Initiative which was mooted by the World Bank and the IMF.

  • Mozambique according to the AfDB must obtain funding in the form of highly concessional loans. These loans that have minimal recourse as opposed to those from private lenders will have a less impact on the budget in terms of crisis.
  • The AfDB reports that during the pandemic years, Mozambique experienced a deterioration in the fiscal and external balances. In 2020 Mozambique's fiscal deficit widened to 7% of GDP after nearly balancing its books the previous year with a deficit of 2.7% of GDP.

This initiative was opened to 73 low-income countries with unsustainably high levels of debt to restructure their loans on a country-by-country basis.

Mozambique prudently signed up for the initiative in September of 2020. The ministry of finance in Mozambique also strongly recommended that the government stop borrowing and look for alternate sources of concessionary funding. This is according to an economics journal called the Club of Mozambique.

The journal made this clarion call to the government by advising that sustainable levels of debt should be at 65% of GDP as opposed to the 85% of GDP which the publication said the government owed.

How can the country claw its way out of debt?

The way is clear. What should give stakeholders in the Mozambican economy confidence is that the country's leaders recognized very early the need to restructure the country's loans and signed up for the Debt Service Suspension Initiative.

This will buy the country precious time to clean up its act financially and economically. Signatories to the DSSI can enjoy a moratorium on loan repayments of up to 1 year and other instances as much as 5 years.

The country also very wisely recognized the need for more concession development finance options to support its economy. The conclusion of the matter will always be the pursuit of export driven economic growth.

  • Mozambique is one of the few African countries that signed up for the IMF/World Bank's Debt Service Suspension Initiative. The country wisely took this option to have its loans restructured.
  • The ministry of finance in Mozambique also strongly recommended that the government stop borrowing and look for alternate sources of concessionary funding. This is according to an economics journal called the Club of Mozambique.

For this strategy to bear fruit or to yield the desired results of economic growth, it needs to prioritize industrialization of its economy to add value to the raw commodities that it produces. Exporting value added goods gives the country much wider scope to earn foreign exchange.

This is how South Korea in 35 years performed a most unprecedented economic miracle becoming an advanced economy from a poor agrarian less than a generation prior.

Beyond alternative funding options and the pursuit of export driven economic growth through rapid industrialization there are structural issues which would hamper the economic development of Mozambique. The World Bank estimates that 67% of the country's 32 million citizens live and work in rural areas.

"Despite having one of the fastest growing economies in Sub-Saharan Africa from 2000-2015, job-creation, poverty reduction, and human capital accumulation were limited, with most of the substantial wealth generated benefiting limited sections of the economy. With a human capital index of 0.36, extremely low levels of human capital are a structural constraint to rapid, inclusive, and sustainable growth in Mozambique," the World Bank says.

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