The International Monetary Fund (IMF) has warned that Mozambique’s economic growth is likely to decline, while its public debt continues to grow.

This pessimistic outlook results from an assessment made by the IMF’s Executive Board following “Article Four Consultations” with the Mozambican government which concluded on 5 March. This refers to Article IV of the IMF’s Articles of Agreement, under which the IMF holds bilateral discussions with members, usually every year.

A release from the IMF board noted that Mozambique’s growth “decelerated in 2016 to 3.8 percent (from 6.6 percent in 2015) and the latest data show that the economy grew by 3.7 percent in 2017, driven by a recovery in agriculture and mining activity”.

It adds that “a tight monetary stance, coupled with exchange rate appreciation, led to a steep fall in inflation to 6.3 percent (year on year) in January 2018, from a peak of 26 percent in November 2016. However, the 2017 fiscal deficit on a modified cash basis (i.e., including external and domestic arrears) is estimated to have increased to around 8.2 percent of GDP compared to 7.6 percent of GDP in 2016, mainly due to continued spending pressures, including from a higher wage bill and high debt service costs”.

The IMF has to admit that not all is bad news – the current account deficit continued to shrink in 2017, which the release attributes “to a boom in mining exports and to a contraction in megaproject imports of services”.

The IMF regards Mozambique as heavily debt distressed since “the stock of public sector debt-to-GDP reached 128.3 percent at end-2016”.

However, this is only true if Mozambique intends to pay those debts. The key factor in the debt distress is the over two billion dollars of illicit loans from European banks (Credit Suisse and VTB of Russia) to the security-related companies Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management). These loans enjoyed illegal guarantees given by the previous government, leaded by President Armando Guebuza, which the present government is not honouring.

Mozambique has repeatedly defaulted on payments of the Ematum, Proindicus and MAM debts, and has told creditors they must renegotiate the debt.

The IMF welcomed the government’s plans “to resume discussions with private creditors and stressed that making progress in debt restructuring discussions would be an important step towards restoring debt sustainability”

But the release claims that “without further policy action, real GDP growth is expected to further decline over time while inflation would remain at current levels”. Since a few lines earlier the release admitted that the inflation rate declined very sharply in 2017, “current levels” would not be a problem.

“The fiscal deficit would expand, leading to further accumulation of public debt and crowding out of the private sector”, the IMF release continued. “Banks’ rising exposure to the government, combined with high interest rates, create potential macrofinancial vulnerabilities”.

The IMF Board argued “that a steadfast fiscal consolidation effort aimed at closing the primary deficit is essential to ensure fiscal sustainability. They urged the need to broaden the tax base by eliminating VAT (Value Added Tax) and other tax exemptions and to reduce current spending, while protecting outlays to social protection and infrastructure projects”.

The main VAT exemptions are on basic foodstuffs. Removing them would be a blow against the poor, and would make nonsense of calls to “protect outlays to social protection”.

The IMF also “welcomed the authorities’ action plan to improve governance, transparency, and accountability. They noted that while Mozambique has a sound anti‑corruption legal framework in place, strengthening implementation and enforcement going forward is key to fighting corruption”.

But it is clear that the Ematum, Proindicus and MAM loans remain a major obstacle to Mozambique restoring normal relations with the IMF and with other western partners. The audit of the three companies by Kroll Associates, regarded as the world’s foremost forensic auditors, showed that hundreds of millions of dollars of the money from the three loans could not be accounted for.

This is not something that will disappear. Once again, the IMF stressed that “full clarity on the use of the proceeds of the previously undisclosed loans contracted by three public companies will be critical to restoring confidence and encouraging private investment”.

After the full extent of the debts became public knowledge in April 2016, the IMF suspended its programme with Mozambique. Other partners followed suit, and all 14 donors who once gave support directly to the Mozambican state budget halted all further disbursements.

This form of aid has not resumed, and clearly will not do so until the audit of the three companies is completed and the whereabouts of all the missing money becomes clear.

-AIM