By Adam Chwojnicki
Now one of the world’s most impoverished and underdeveloped countries, Mozambique was once regarded as the epitome of rapid economic growth in the sub-Saharan region. Today the country suffers from a devastating economic crisis, triggered primarily by the discovery of underreported debt agreements. Seeking to meet repayment obligations the government has pursued austerity measures. These policies, however, have not brought the much-needed results to an already crisis-stricken economy. How did a once so promising economy end up falling into a debt crisis?
After the end of the Mozambican civil war in 1992 – a bloody conflict that, according to some estimates, claimed more than a million lives – Mozambique was one of the fastest growing economies in the world. With an abundance of several natural resources, ranging from base minerals such as aluminum to fossil fuels like coal, policymakers aimed to facilitate a quick transition towards export-led economic growth while reducing dependence on agriculture. To achieve these goals policymakers implemented a plethora of free-market policies, consisting of a set of privatizations of state-owned enterprises and reductions in tariffs and other trade barriers. These actions efficiently improved the business environment and opened up the domestic market to foreign investment and enterprises. Mozambique moved towards becoming an economically integrated emerging market, a process supported by two Bretton Woods institutions: the International Monetary Fund (IMF) and the World Bank. As a result of embracing market-friendly reforms and focusing on natural resource-based exports, the economy skyrocketed, reaching its zenith in 1996. This in turn brought improvements in living standards and progress in eradicating abject poverty. Over the long term, Mozambique came to be perceived as a promising investment opportunity. The rapid economic growth, however, became increasingly reliant on foreign capital and exports of commodities, which subsequently resulted in the current debt crisis.
In 2013, two investment firms, one Swiss and one Russian, arranged two billion dollars in loans to several state-owned Mozambican entreprises. The borrowed capital was meant for the purchase of naval boats and equipment, which in turn was supposed to increase revenues from fishery to state coffers. However, the capital was inadequately allocated and did not generate significant revenues. Furthermore, these immense loans were not openly documented to the public or even to the Mozambican parliament and the IMF, which meant that the true size of Mozambique’s total debt burden was undisclosed. When these loans were exposed to the public in 2016 the official record of the public debt rose to an unsustainable level, and two major occasional lenders – the IMF and the World Bank – suspended financial aid. The economy stumbled and the credibility of Mozambique as a debtor was hammered, resulting in a rise in government bond yield when fewer international creditors were willing to arrange new loans. With higher borrowing costs, Mozambique now faces debt repayment difficulties, which de facto has lead to a sovereign debt crisis. According to the IMF, Mozambique will not be able to repay some of its debt for at least five years.
Perceived as the panacea to improve the country’s credit rating and regain the confidence of investors in a time of debt crisis and fiscal profligacy, Mozambique embraced indispensable tools widely known as austerity measures. Mainly by cutting public expenditure the government aimed to reduce the budget deficit, thereby demonstrating to investors the country’s willingness to meet debt repayments. While these cuts significantly reduced government expenditure, the budget deficit still remained at a high level due to the shortfall in state revenues. The drop in commodity prices resulted in disappointing tax revenues from main exports, mineral fuels and base metals. Other sectors do not significantly contribute to total tax revenues because for years, the Mozambican growth model has excessively relied on exports of commodities, leaving the economy non-diversified. Besides, collecting tax revenue has proved difficult due to mismanaged government institutions. After using every conceivable fiscal policy, the Mozambican government finally undertook the action of renegotiating debt terms with creditors. However, no groundbreaking settlements between debtor and creditors have been achieved so far.
In conclusion, with the end of the civil war and the implementation of numerous free-market policies, Mozambique quickly became an economic success story. The economy reached a high growth rate due to an export-oriented economy based primarily on the exploitation of natural resources. However, Mozambique currently suffers from immense economic hardship ultimately caused by the exposure of undisclosed loans. Aid and loans from international institutions have been halted and the credibility of Mozambique among lenders has plummeted, resulting in higher borrowing costs. Facing debt repayment difficulties, the government has pursued austerity measures to balance the budget by cutting public expenditure. These policies, however, have not brought the desired effects because of a shortfall in state revenues. The question remains: How will Mozambique reverse the crisis? Will the country be able to repay its debt? Only time will tell.
By Adam Chwojnicki
Image: Julien Lagarde
Adam Chwojnicki is an undergraduate student at Uppsala University and an aspiring economist with a passion for international trade and monetary policy.