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IMF: Only USD 470 Million?

IMF: Only USD 470 Million?

  • João Gomes • Partner @ JASON Mozambique

This article is about the recent technical agreement between the International Monetary Fund (IMF) and the Government of Mozambique for the implementation of the Extended Fund Program2 (APP), which will run from 2022 – 2025, disbursing financial assistance in the amount of USD 470 million, or in IMF “currency”, SDR3 341 million, for the first time since the occurrence of the hidden debt crisis.

I invite my reader to answer the following question: will Mozambique “only” receive 470 Million USD, or will it be much more than that?

Let us see successively:

  1. “Only” USD 470 Million of financial assistance?
  2. Other intervention instruments.
  3. “Only” USD 470 Million of financial assistance?

If we look at the relative weight of the proposed PFA, relative to Mozambique’s Gross Domestic Product (GDP) foreseen for the 2022-2025 financial assistance period we will have:

  • In 2022, for a projected GDP of USD 14.89 billion4, the PFA will have a relative weight of 3.16%.
  • If, perhaps, we measure the weight of the PFA at a different time, e.g. 2023, it will have a weight of 2.82%. If in 2024, 2.46%. If in 2025, 2.15%.

Aggregating the value of the GDP foreseen for the period 2022-2025, amounting to 72.52 billion USD, the PFA will have a very small relative weight of 0.65%.

Additionally, and as proven by several studies5, if, due to the very likely difficult conditions associated with the PFA (austerity!), we consider the possibility of Mozambique not being able to ensure a full execution of the approved assistance package, it will be left without withdrawing a significant part of the financing tranches (i.e. break-effect).

The IMF itself (2001) informs6 that countries met the structural criteria in only 57% of all programs between 1987 and 1999. Admittedly, there has been enough time for this metric to have improved in the meantime, but it is still a proxy for the likely break rate. Along these lines, the worst implementation rates were found for the conditions on privatization (45%), the social security system (56%), and public enterprise reforms (57%).

So, in this context, USD 470 million is not much!

From the perspective of the medium and long term objectives associated with the APP, and summarizing the statement of the IMF mission chief7 , we know that the USD 470 million are mostly destined to implement the classic neo-liberal agenda of the already nicknamed “Chicago Boys “8 :

  • Support reform and reduction of public expenditure and the public sector: for example, by reducing staffing levels and salaries in public administration9.
  • Support reform of tax administration and taxation: e.g., by raising VAT10.
  • Support the government’s social reform agenda: for example, by reducing poverty and increasing social protection11.
  • Outside the neoliberal agenda, but because of the hidden debt crisis, the objective of transparency in the management of public funds, the fight against corruption and good governance is reinforced: for example, through capacity building of officials and the implementation of good practices in monitoring and evaluation of funds12.

We are surprised by the absence of explicit references in the above-mentioned statement – since they are part of the hard core of the IMF doctrine – to reforms:

  • Of legislation and the labor market.
  • Of the state enterprise sector and the need to carry out privatizations.

Notwithstanding these exclusions from the mission chief’s statement, the ambitious scope of the PFA’s objectives reinforces our idea that USD 470 million tastes like very little…and to do a lot!

However, it is fair to mention that Mozambique, member of the IMF since September 24, 1984, its quota is SDR 227.2 million, i.e. USD 311.37 million.

And that on 12/31/2021, in relation to the IMF, Mozambique had a negative balance of SDR (350,27 Million)13 i.e. USD (439,15 Million), under the item “Outstanding purchases and loans”, resulting from nine previous interventions.

From this perspective, a PFA for Mozambique, valued at USD 470 million, knowing little and fulfilling much, already exceeds the value of its quota in the institution now led by the second woman in the position of Managing Director, the Bulgarian Kristalina Georgieva.

  1. Other instruments of intervention.

But expecting that the recovery of the Mozambican economy-while addressing the challenges of social inclusion, debt and financing, and long-term structural challenges-results solely from the action of financial instruments is “taking the forest for the tree”.

Indeed, studies14 point out that IMF programs have important indirect multiplier effects that go far beyond the Fund’s conventional tools of money and conditions.

In this context, the “stamp of approval/confidence”: the approval, within weeks, of the PFA will trigger a mobilization effect of additional funding from, among others, the World Bank15.
And the coming into play of donors whose funding was interrupted by the hidden debt crisis.

In conclusion

In the specific context marked by the arrival of the floating gas production platform, as well as the culmination of the hidden debts trial, space is once again opening up for the creation of a climate of confidence among foreign investors in Mozambique. Were it not for the issue of terrorism in the north!

The IMF will launch, through the Extended Fund Facility (EFP), its 10th operation in Mozambique, worth USD 450 million, for the period 2022-2025.

Although we consider the amount made available to be short, bearing in mind the size of the objectives to be achieved, we believe that the catalytic effect of this EFP can mobilize many more additional funds that will make Mozambique more resilient to financial crises.

But far beyond the USD 470 Million, this is the opportunity to test, i) on the side of the State, the will to reform and to manage in a transparent way the scarce resources; ii) and, on the side of the citizens, the resistance to go through another period of austerity, which is certainly coming.

1Staff-Level Agreement: This pre-agreement is still subject to the approval of IMF Management and the endorsement of the Executive Board, which is expected to take place in the coming weeks.

2 ECF – Extended Credit Facility.

3 Special Drawing Righs. SDRs function as an internal IMF currency that countries can exchange among themselves for foreign exchange reserves, such as dollars or euros. For a review of how the SDR is calculated check out https://www.imf.org/external/np/fin/data/rms_sdrv.aspx. At the time of writing 1 SDR = 1.371210 USD.

See Also

4 Source: https://www.statista.com/outlook/co/economy/mozambique#gross-domestic-product (Reading April 09, 2022).

5 Joyce, J.P., 2003, Promises Made, Promises Broken: A Model of IMF Program Implementation, Wellesley College Department of Economics Working Paper 2003-03.

6 The International Monetary Fund, 2001, Structural Conditionality in Fund-Supported Programs, February 16, http://www.imf.org.

7 This can be found on the IMF website: https://tinyurl.com/9tfhzfte.

8 “Chicago Boys”: Klein, N., (2007) ‘The Shock Doctrine’, London, Penguin Books.

9 PIRIS, Álvaro: “Reduce pressure on public finances from remunerating public servants and lead to convergence of the wage bill, as a ratio to GDP, towards average levels observed in the wider region”.

10PIRIS, Álvaro: “The agreed measures include a series of reforms to tax administration and VAT policy”.

11PIRIS, Álvaro: “Addressing poverty and providing social protection are an important part of the government’s reform agenda”.

12PIRIS, Álvaro: “The program also addresses transparency in debt management and the natural resource sector”.

13Check at https://www.imf.org/en/Countries/MOZ.

14DREHER, Axel et al (2008) “Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises”.

15In this line, the recent approval by USAID of the five-year partnership agreement, worth USD 1.5 billion.

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