In Nature, the formation of a pearl inside an oyster is triggered by a context of adversity. When “invaded” by grains of sand, an oyster’s reaction is the production of nacre. Accumulated in several concentric spherical layers, the nacre forms a pearl.
The formation of the current Mozambican economic model began in 1984. Mozambique’s accession to the World Bank and the International Monetary Fund (IMF) was one of the factors that supported the adoption of a centralized economic model. These were the foundations that led to the launch, in 1987, of the Economic Rehabilitation Program.
In the following decades, the support and influence of the IMF allowed for the inclusion of the country in the Heavily Indebted Poor Countries Relief Program. The inclusion of Mozambique in this Program proved to be essential in reducing public debt from around 6 billion dollars in 1998 (153% of GDP) to 3.5 billion dollars in 2006 (49% of GDP).
“The grains of sand”
In 2008 the program of financing and support for national policies began, aimed at consolidating Mozambique’s economic recovery. Despite the promising start of the program (which allowed the country to achieve a GDP growth rate of 6.7% in 2015), it was eventually suspended with the departure of the IMF in 2016. The impacts of this first grain of sand generated a slowdown in economic growth in the following years, which in 2019 stood at 2.3%.
In this context of economic adversity, the emergence of the Covid-19 pandemic intensified the challenges and difficulties that the country was experiencing, and the restrictions and preventive measures observed worldwide impacted global production levels and limited supply chains across the Globe. As a consequence of this new grain of sand, Mozambique observed in 2020 a -1.2% reduction in GDP, and the trade balance deficit worsened to -2.29 billion dollars.
When, at the end of 2021, the Mozambican economy seemed to show the first signs of recovery from the successive pandemic waves, the latest grain of sand appears: the war between Russia and Ukraine. Against an already turbulent backdrop of global inflationary pressures, amid rising food and energy prices and disrupted supply chains in the wake of the coronavirus pandemic, the war between Russia and Ukraine has compounded global supply and demand tensions, threatening global economic recovery and growth.
“Signs of nacre?”
The first signs of nacre appear to be the return of the IMF to Mozambique. Under the Extended Credit Facility (ECF) program recently concluded between the IMF and the government, the IMF plans to provide up to $470 million over the next three years for the purpose of supporting the economy. This support will, however, have new conditions that aim to avoid repeating the mistakes of the past, namely conditions based on transparency in the management and application of funds and a focus on increasing the robustness of public entities.
Alexis Meyer-Cirkel, IMF representative in Mozambique, confirms that the ECF program aims to support macroeconomic stability, enhancing a sustained and inclusive growth that reduces poverty levels in the country. On the one hand, the conditions defined by the IMF foresee reforms at the level of public revenue, through changes in tax administration and the VAT code, which stimulate foreign direct investment.
On the other hand, there is a focus on curbing public spending, which is partly based on the recently approved reform of the state wage bill and the approval of a Sovereign Wealth Fund Law.
The nacreous signs also seem to manifest themselves with the confirmation of the resumption of the nearly $20 billion project announced by the French multinational TotalEnergies. The project located on the northern coast of the country was initially suspended due to the instability generated by the political-military conflict in Cabo Delgado Province, and is now expected to resume at the end of 2022.
The apparent increase in stability in the region, leveraged by the international military support shown by Rwanda and the member countries of the Southern African Development Community (SADC), seems to support the decision to resume the project, which is estimated to produce about 13.1 million tons of liquefied natural gas (LNG) annually. The unfolding reality of this project may also support ExxonMobbil’s final decision to develop a larger project in the near future.
The concentric accumulation of both layers of nacre seems, however, to be conditioned by the combination of the conditions defined by the IMF with the potential of the LNG projects. Accelerated by the global increase in gas prices, the passage of a Sovereign Wealth Fund Law will be essential to transparently manage and apply the revenue generated by natural gas.
Recently, Max Tonela, Mozambique’s Minister of Finance, confirmed that the Government is finalizing draft legislation for the Sovereign Wealth Fund that will ensure the management of the approximately $96 billion in revenues associated with the export of LNG. It is estimated that the Fund will begin operations in October 2022, and that of the total revenues of the fund, 50% will be reapplied to the fund, while the remaining 50% will be allocated to the State Budget (SGB) during the first 20 years of natural gas production.
In the present scenario it thus becomes pivotal that the IMF support and the natural gas revenues allocated to the OGE be directed to stimulating foreign direct investment and to combating structural issues such as poverty, job creation and in the education sector. While the potential for the formation of a Mozambican pearl is clear, its materialization will ultimately lie in the ability of national leaders to rise above the mistakes made in the past, and in their ability to leverage the existing nacre in creating a robust economic ecosystem to address the major structural issues facing the country. As a result of a long experience in the Mozambican market, and a large presence in the African continent, we are very familiar with the reality and challenges of emerging economies.
At EY, we have been following, with growing expectation, the future prospects for Mozambique, actively contributing to support the private and state business fabric. Aware that the vision of a Mozambican pearl is a joint challenge for the country, we enthusiastically face the opportunity to strengthen our support to the empowerment and development of national resources, for the sake of the future we all look forward to for Mozambique.