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Mozambican Finance Minister Maleiane does not have an easy job. Yet his resolve has helped promote macroeconomic stability and encourage investment in one of Africa’s fastest-growing economies.
With the previous government known for its free-spending ways, the incoming government making lofty employment promises, and the economy feeling the tremors from both a Federal Reserve rate hike and a fall in Chinese demand, whoever was to be chosen in January 2015 as Mozambique’s new finance minister would certainly have his work cut out for him.
Enter Adriano Maleiane, chief executive of the state-owned Mozambican development bank. His longstanding ties to the ruling socialist-inspired Frelimo party might have made him a questionable choice to observers worried about the fragility of democracy in a state that in many ways is still reeling from a 16-year civil war several decades earlier. Yet his strong knowledge of the Mozambican economy, illustrated by his prior fifteen-year stint as central bank governor, gave hope to reformers who wished that Maputo could finally prioritize financial transparency and soundly prepare for a coming massive influx of oil and gas money.
One year on, it seems President Filipe Nyusi made the right choice.
A rocky start
Maleiane inherited an economy buoyed by expectations about future energy development, chiefly the 170 trillion cubic feet of offshore natural gas reserves in northern Mozambique’s Rovuma Basin, presently being developed by energy giants Eni and Anadarko. The field is slated to transform the country into the world’s third largest exporter of LNG, and within a few years net Maputo $20 billion annually, triple the current budget. Investors were bullish about the country’s well-established coal industry as well, with an estimated25 billion short tons untapped in Tete province.
However, fears of a coming “resource curse” were not wholly unfounded, evidenced by former President Armando Guebuza’s penchant for costly public projects like the Maputo Ring Road, Maputo-Catembe Bridge, and the setting up of the state-owned Ematum tuna company, even as commodity prices were tumbling, trade growth was diminishing, budget deficits were widening, and debt levels were increasing.
Indeed, it was the latter fishing project which was part of the reason Standard and Poor’s (S&P) lowered Mozambique’s sovereign credit rating from B+ to B in February 2014. And when a report detailing how a sizable amount of Ematum’s $850 million government-backed bond issue was actually spent on military equipment was released a few months into Maleiane’s tenure, S&P downgraded Mozambique’s long-term rating yet again, to a B-.
The start of fiscal prudence
But in an economy where often-fickle aid and foreign direct investment comprise 40% and 26% of GDP, respectively, Maleiane soon set his stamp on sound fiscal management.
He immediately made his mark on reigning in government spending. In 2014, Mozambique’s budget deficit was 10% of GDP. That dropped to 6.5% a year later under Maleiane’s watch. No doubt that some of this was due to pressure from donors and the IMF. Yet the finance minister proved himself an able reformer during his past stints in government, overseeing much of the privatization in Mozambique’s financial sector and tackling corruption at the central bank.
In addition, steps were taken to increase revenue, such as expanding the tax base, streamlining the state revenue authority, and enabling tax payments both online and at banks. This is expected to boost revenue by 1% of GDP, and will be soon be complemented by possible plans to privatize more than half of all companies in which Maputo has a stake.
At the same time, Maleiane has firmly pushed for financial transparency, digitizing payments to public sector employees alongside rolling out automated electronic payments for all public procurement processes. He also convinced the government to tie its hands when it came to future budgetary influxes, introducing new rules governing windfall revenue (restricting its use to certain public investments, debt repayment, or national emergencies).
These moves even extended to the past administration’s poor accounting, which led to Mozambique’s business community being owed as much as $300 million in VAT reimbursements. Through securitizing the debt, Maleiane made sure to honor the promise, while not drastically increasing annual outlays from the treasury.
But the former SOAS graduate also understands that prudent fiscal management does not preclude external financing, especially at concessionary terms. Maleiane has already helped secure a soft loan of $250 million from Japan for a large-scale expansion of the critical Nacala port in Mozambique’s north.
The coast is not yet clear
Also notable was acquiring a $286 million Standby Credit Facility from the IMF, although the context behind it was more than a bit troubling: Maputo suffers from the third-highest current account deficit in the world (45% of GDP), and of the more than 30 African currencies Bloomberg tracks, the metical was the second-worst performing across 2015, losing more than half its value between September and December 2015 alone.
It is true that the metical’s biggest drop against the dollar in two decades has been slightly offset by appreciation so far this year, and inflation in Mozambique remains relatively contained. But this still shows how difficult it is to gauge fiscal performance in an environment where emerging country currencies and economies are greatly impacted by interest rate increases in the US, slowing demand from China, and the global commodities crash.
In spite of its promise, Mozambique continues to face a number of economic obstacles. Moody’s cut its credit rating from B2 to B1 in August and placed it under further review a few months later. In November, government employees were paid late, a sign that Maputo may have a larger and more volatile short-term fiscal gap than previously thought. In spite of Maleiane’s best efforts, public sector debt has risen from 37% of GDP three years ago to 60% today, with overall debt reaching a worrisome 99% of GDP today.
Finally, the biggest issue that threatens to derail Maleiane’s steady economic hand is beyond his control: sporadic violence and increasing tensions between the state and elements of Renamo, the political party which battled the Frelimo during the civil war and even now maintains some armed elements in Mozambique’s central and northern regions.
Chances are a political resolution will ultimately be found, especially given the risk that renewed instability has on the natural gas bonanza. But both sides occasionally look to flex their muscles in order to better their position at the negotiating table, and investors are surely taking notice.
Yet, in a country where the IMF predicts annual economic growth might balloon from under 7% today to as high as 24% in as little as five years (due to forthcoming natural gas production), a continuation of gradual fiscal reforms and budgetary belt-tightening in the interim will likely be sufficient to improve Mozambique’s economic prospects. And few are better placed at the helm to drive these changes than Adriano Maleiane.
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