Mozambique’s never-ending debt crisis

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MOZAMBIQUE, the southern African nation, can’t seem to catch a break. In March, a record category-4 cyclone named Idai killed 750 people, destroyed crops ripe for harvest and left many thousands homeless and starving. Then, Cyclone Kenneth hit in late April and left even more misery in its wake. The twin storms caused more than $1bn in damage – about 10 percent of the nation’s GDP, writes Eugen Iladi*.

Even before these disasters, 55 percent of Mozambique’s 27 million people were living in poverty on an average of $600 a month. Median life expectancy is only 55 compared to 71 for the world on average.

Until recently, Mozambique’s ray of hope has been its economy, growing 6-7 percent annually over the past decade before levelling at a respectable 3.7 percent in 2016 and 2017.  But even that glimmer has been clouded by an ongoing disaster: Mozambique’s history of debt default, an affliction that has hurt all of Africa.

Mozambique’s debt story is not unlike what happened in the 2008 US financial meltdown. The American and global economies nearly collapsed, recession ensued and unemployment spiked.  A major reason: dubious borrowings. Mozambique unfortunately has earned its reputation as a dubious borrower.

Mozambique’s latest loan default, totalling $2bn, came after the government in 2010 decided to launch a series of ambitious seafaring projects to protect its 1,400-mile shoreline. The has an abundant fishery resource and recently discovered huge offshore oil and gas reserves.

The government had plans to launch a shipbuilding industry. It also needed to protect itself from pirates, illegal fishing by foreign fleets, drug smugglers and other miscreants in the Indian Ocean.

Mozambique contracted with a global shipbuilding company for ships and related systems and borrowed $2bn to fund the projects. The equipment arrived and was paid for, but Mozambique abandoned the projects and defaulted on the loans that financed them.

The International Monetary Fund (IMF) accuses Mozambique officials of hiding $1bn of the debt.  Accusations are also flying that millions went to kickbacks and bribes. In the wake of this financial storm, the IMF suspended its assistance programme to Mozambique.

Sadly, Mozambique’s debt default is history repeating itself. In the late 1990s, the World Bank included Mozambique in its Heavily Indebted Countries Initiative (HIPC), eventually providing $1.4bn in assistance involving debt relief of nearly $3bn. Mozambique was facing a devastating debt-service burden even after exhausting traditional debt-relief.

The World Bank eventually lowered Mozambique’s debt service payments, freeing up resources for the nation’s health and education spending, and also helped re-establish Mozambique’s normal relations with creditors to restore domestic and foreign private sector investment.  Mozambique managed to reduce its outrageous inflation that in 1987 reached 164 percent but was still at 70 percent in 1994.

Mozambique’s historic struggle with debt burden is not unusual for many African nations that have long suffered from poverty, hunger, disease, civil conflict and violent political instability.

The IMF says public debt rose to about 50 percent of GDP in 22 African countries at the end of 2016, twice the level of three years earlier. Nonperforming loans are straining financial systems while debt servicing costs have doubled, absorbing about 10 percent of government revenues and even more in oil-producing countries such as Angola, Gabon and Nigeria, where 60 percent of revenues pay debt costs.

As the IMF noted in its April 2019 issue of the Regional Economic Outlook: Sub-Saharan Africa, 16 nations in the region either have a high risk of debt distress (Burundi, Cameroon, Cabo Verde, Central African Republic, Chad, Ethiopia, Ghana, Sierra Leone, Zambia) or already are in debt distress (Republic of Congo, Eritrea, The Gambia, Mozambique, São Tomé and Príncipe, South Sudan, Zimbabwe).  Debt ratios are close to or exceed risk thresholds in other countries including Namibia and Seychelles.

Overall, some 40 percent of sub-Saharan countries are on the edge of a debt crisis. The number of countries unable to service their debts has doubled in the past year.

Why? The reasons vary from country to country, the IMF explains. Some over-borrowed to fund human capital and infrastructure development needs when global financial conditions overall were better. Others suffer from the 2014-2016 commodity price shock, which rivalled the collapse following the global financial crisis. A few were forced to load their public balance sheets with debt arising from exchange-rate depreciation or failed state-owned enterprises—like those three state-owned companies Mozambique set up for its seafaring projects.

The cyclones only worsened Mozambique’s debt situation, leading the World Bank to warn in March that ‘debt levels remain unsustainably high.’

Hearts of the world ache for the people and plight of Mozambique. But Mozambique’s government must know that Mozambique’s biggest challenge is not just rebuilding after the cyclones. It’s rebuilding the trust of people and institutions that might be willing to lend it money that is needed to ensure that its economy continues to chug along.

*Eugen Iladi is a freelance reporter based in Virginia, USA, who covers politics, conflict, business and development in emerging markets.

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