Mozambique’s economy drifts on to the rock... - CNBC Africa

Mozambique’s economy drifts on to the rock...

Southern Africa

by Imara Africa Securities 0

A panoramic view of Maputo, the capital of Mozambique and the largest city in the country. Photo: Wikipedia

This report was written by Imara Africa Securities. Imara serves African markets and promotes investing on the continent. Its funds under management exceed $484.15million.

 

Hard times have fallen on the Southern African country because of a fall in world prices of raw materials coupled with some much-criticised public spending according to a report by AFP. The Mozambican metical has dropped by more than 40% against the US dollar since the beginning of the year, marking the worst ever decline by an African currency with the exception of the Zambian kwacha, according to Bloomberg’s financial information service. The outcome has been a hike in domestic prices, particularly inevitable in a country like Mozambique, which has to import an enormous proportion of consumer goods.

Mozambique exports natural gas, coal, cotton and aluminium, but the prices for such raw materials have fallen over several months. Economic prospects depend largely on exploiting vast reserves of gas, which were discovered in the north since 2010 by the Italian oil and gas corporation ENI and the US firm Anadarko. But both corporations have pushed back their investment plans for 2016 because of the steep fall in the price of the fossil fuel. Meantime, prices rocket. "We should work to compensate for imports. After all, we’re an agricultural country, but also a trading route for several landlocked nations that need our ports, rail links and roads," central bank governor Ernesto Gove said.

Though the average annual growth rate has been 7% for 20 years, the poverty level is stagnating at 54% of the population, former Prime Minister Luisa Diogo pointed out. "The structure of our economy remains fragile." Indeed, for the first time in a decade, Mozambique turned to the International Monetary Fund at the end of October for a loan of USD 286m to improve the financial situation. Then, on December 14, parliament approved cuts in the 2016 budget. However, observers are most concerned by a lack of foreign currency reserves. On November 30, the central bank announced a ceiling on cash withdrawals abroad in a measure to avoid currency flight.

Critics blame former president Armando Guebuza, in charge from 2005 to 2015, for wasting money on questionable investments. They include a giant bridge in the capital and an unfinished ring road around the city, both more costly than planned. Equally controversial is the acquisition of a tuna fishing fleet by state-owned firm Ematum. Financed by a state-guaranteed bond of USD 850m, the deal caused uproar once it emerged that much of the money was actually being spent on surveillance vessels and military equipment ordered from France. Under pressure from international donors, the government finally shifted USD 500m of the loan into the official defence budget. The sum was therefore counted as part of the country’s public debt, which is expected to soar to 62% of gross domestic product at the end the year, compared with 38% in 2011, according to financial services firm Fitch.

"The boats have still not been used and are rusting in the harbour," protests Ivone Soares, head of the parliamentary opposition group. "The money has been spent uselessly and nobody is able to say what it was for." Mozambique is another victim in SSA of overreliance in commodities to whom falling commodity prices have brought serious fiscal challenges. After decades of uninterrupted growth the country now has to confront it’s over reliance on raw material exports. As we have seen in Ethiopia, countries need to diversify away from primary commodities into manufacturing to sustain employment and growth

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