Cash-shy Mozambique defaults on bond, as political problems start mounting
MOZAMBIQUE, once one of the world’s fastest-growing economies has now plunged into economic and political crises simultaneously and risks falling back into civil war.
Last week, it became the first African country to default on dollar bonds since Ivory Coast in 2011 when it failed to settle an almost $59.8 million (R803m) coupon to holders of its 2023 bond.
The government said its deteriorating fiscal position and poor economic situation made it unlikely that it will be able to settle its debts this year. In April the International Monetary Fund and World Bank cut financial aid to the country because of an undeclared government debt of more than $2 billion.
Last year, Mozambique’s public debt ballooned to 130% of GDP. The country’s currency plummeted. Inflation last year was 25%.
Oil and gas discoveries in the past decade have fuelled growth, investment and optimism in Mozambique. The government went on a loan spree.
However, falling commodity prices and increasingly higher interest rates in industrial countries have hammered Mozambique and many other African commodity producers.
Last year, investigations revealed that Mozambique used the proceeds from the sale of $850m in bonds issued in 2013 to fund the development of the tuna fishing industry to buy arms.
Another, separate scandal erupted when the government in April conceded it had taken out $1.4bn in loans in secret and that much of the money had disappeared.
The IMF, World Bank and other donors cancelled their aid to Mozambique.
In December, the US Securities and Exchange Commission launched an investigation into the 2013 bond sale.
At the same time, Mozambique has plunged into a political crisis following a fallout between the governing Mozambique Liberation Front (Frelimo) and the main opposition Mozambican National Resistance (Renamo).
Frelimo and Renamo waged a bloody 16-year civil war, from 1976 to 1992. Frelimo has been in power since independence from its former colonial power, Portugal, 41 years ago.
Since 2013, sporadic violence has broken out between Frelimo and Renamo combatants, members and supporters, forcing thousands to flee to neighbouring countries.
Violence between Renamo and Frelimo escalated ahead of the 2014 elections, with civil society, particularly the Catholic Church, getting to agree on a truce to allow the elections to take place in October.
Renamo rejected the results of the election, saying it was rigged. Afonso Dhlakama, the head of Renamo, in December 2015 declared that Renamo would take power in six of the country’s 11 provinces which he claimed the party won in the elections.
The Mozambique security forces have attacked what they call military bases belonging to Renamo.
Renamo is also still aggrieved about the failure by Frelimo to honour key elements of the original 1992 peace agreement, the Rome Accord, specifically to include former Renamo fighters in the regular army, police and security forces.
In addition, peace talks between Renamo and Frelimo since the elections have yo-yoed. Dhlakama in late December declared a week-long truce over the festive and new year period.
On January 3, Dhlakama extended the duration of the truce to two months.
This week, Mozambican President Filipe Nyusi and Dhlakama agreed to restart peace talks, but without the aid of international mediators.
Portugal developed the southern part of Mozambique, where most of the settlers lived, more than the northern parts. This is a similar pattern to the way most colonial powers developed their colonies.
Indigenous Mozambicans who lived in the south had better access to resources than their northern cousins because of the proximity of the relatively more advanced development.
In most African countries the opposition is either from a different ethnic group than the governing party, or they were former foes in violent conflict, or were on opposite sides during colonialism.
To reconcile such historical enmities necessitates that winning parties share the spoils of government with their former “enemies”.
This has not been the case in Mozambique, neither has it been the case in most African countries.
The tragic problem of all African electoral systems is the winner takes all system in which the winning parties secure all power – and the opposition nothing. This is the same for Mozambique. The double tragedy is that winning governing parties do not share power with the losing opposition – as is the case in Mozambique. The high economic growth the country saw in the past few years has not been shared.
In fact, it has created a wealthy elite connected to the ruling Frelimo and their families. It has increased inequality between a small elite connected to Frelimo and the overwhelmingly poor majority.
Clearly, Mozambique will have to renegotiate its debt. Debtors must allow the country to postpone payments. The country’s total foreign debt is $10.1bn.
Multilateral creditors, including the World Bank, IMF and African Development Bank are owned $4.1bn. Bilateral or country creditors, of which China is the largest, but including Brazil, are owed $4.3bn collectively, and commercial creditors are owed $1.7bn.
Mozambican President and Frelimo leader Nyusi and Renamo’s Dhlakama must step up peace talks with greater urgency to prevent the country from spiralling back into civil war.