What (else) could go wrong?by robert looney
bob looney teaches economics at the Naval Postgraduate School in California.
Published June 5, 2018
As often as not, sudden spurts of economic growth in developing countries prove to be unsustainable. The culprit may be one of the usual suspects — adverse external shocks like hurricanes, imprudent fiscal policy that triggers inflation and capital flight, political unrest, or the economist’s favorite: “the resource curse” associated with the windfall profits of natural wealth. Rarely, however, has the mere expectation of future wealth short-circuited balanced growth, as has happened following the discovery of natural gas off the coast of Mozambique.
When natural gas was discovered in 2009-10, Mozambique finally appeared to have found some economic traction after its disastrous post-independence experience. In 1975, newly liberated (from Portugal) Mozambique was one of the world’s poorest countries. Mozambique’s living standard went from awful to really awful over the next two decades as civil war raged and the country pursued a hapless socialist development model that yielded little-to-no growth or productive investment.
In 1992, the civil war between the Frente de Libertação de Moçambique (Frelimo) and the rival Rename political party ended, and Frelimo emerged from Mozambique’s first democratic elections as the dominant political party in 1994. The government adopted a more pragmatic, albeit narrowly based, development strategy, centered on investments in large, capital-intensive megaprojects — usually foreign-owned and focused on generating exports of natural resources.
Under the new strategy, the economy not only made some headway, but managed one of the emerging world’s highest rates of expansion. The International Monetary Fund reported an average annual growth rate of 10.6 percent in 1993-9 and 7.7 percent in 2000-09 — up from a miserable 0.8 percent in 1980-92.
Precipitously resource-rich nations, like lottery winners, often end up in worse shape than they started. Resource wealth’s corrosive effects have been associated with increased corruption and growing income inequality: think Venezuela, Nigeria, Equatorial Guinea and Angola.
Indeed, the discovery of natural gas offshore had the potential to usher in an era of relative affluence, particularly after further exploration suggested that the country’s reserves might be as large as 250 trillion cubic feet — the third largest cache of gas in Africa. However, this seemingly good news came with a catch: precipitously resource-rich nations, like lottery winners, often end up in worse shape than they started. In addition to concerns that a strong currency fed by resource exports would doom export-oriented agriculture, resource wealth’s corrosive effects have been associated with increased corruption and growing income inequality: think Venezuela, Nigeria, Equatorial Guinea and Angola.
However, the worst is hardly inevitable, as demonstrated by the successes of Chile (which exports a mountain of copper) and Mozambique’s next-door neighbor, Botswana, which has managed its vast cache of gem-quality diamonds with aplomb. And with gas not scheduled to flow until 2018 at the soonest, Mozambique theoretically had time to insulate its economy and polity from collateral damage in the race to manage the windfall.
Such was not to be. Using newly discovered gas as collateral, the government quickly stepped-up public sector borrowing, confident that future gas revenues would be more than sufficient to cover interest and principal. With the money from these loans, Mozambique did up its rate of investment from an average of 23 percent of GDP from 2000-09 to 42 percent from 2010-7.
Rather than increasing growth, however, the investment boom has had a perverse dampening effect. The IMF initially estimated that likely levels of investment and production between 2013 and 2023 would result in an added two percentage points of GDP growth per year. Instead, growth has shown a steady decline from 7.4 percent in 2014, to 6.6 percent (2015), to 3.8 percent (2016) and 3.0 percent in 2017.
While part of the decline can be explained by the concentration of recent investment on infrastructure for future gas production, corruption has also played an outsized role. In 2016, investors discovered that $850 million from government bond proceeds ostensibly issued to revive Mozambique’s tuna fishing industry was actually used to purchase truly unneeded military equipment. This revelation was followed by the government’s admission that it had raised nearly $1.4 billion in off-the-books loans, much of which had vanished without a trace.
The World Bank’s World Governance Indicators reflect this turn of events. Between 2010 and 2016 (the latest year available), Mozambique fell from the 44th to the 34th percentile for “voice and accountability” (a rough measure of democracy), from the 58th to the 12th percentile for political stability/absence of violence, and from the 30th to the 19th percentile for “government effectiveness.” In the same period, “rule of law” fell from the 39th to the 16th percentile and “control of corruption” from the 40th to the 18th percentile.
With international investors already loath to acquire additional government debt, the IMF halted assistance in 2016. This pushed Mozambique’s public debt to an unmanageable 130 percent of GDP. The currency went into free fall, and Mozambique’s sovereign credit rating dropped to the territory occupied by bankrupt Venezuela. To no one’s surprise, the government defaulted in 2017. To make matters worse, gas revenues, which had been anticipated to begin this year, may not materialize until 2023.
In last December’s evaluation of Mozambique’s economy, the IMF stressed the need for debt restructuring, but acknowledged that creditors would be understandably reluctant to negotiate in the face of then-estimated $2 billion in concealed loans. For its part, Mozambique’s government has obstructed attempts to determine the full extent of these fraudulent loans and to improve fiscal transparency in general.
Although the government points to the recent partial recovery of the country’s currency and a decline in inflation, the fact remains that state companies are bankrupt, and salaries and debts cannot be paid.
While the IMF also expressed little confidence that Mozambique’s government would cut spending, under the current circumstances there may not be another choice. Although the government points to the recent partial recovery of the country’s currency and a decline in inflation, the fact remains that state companies are bankrupt, and salaries and debts cannot be paid.
The lack of poverty reduction or improved income distribution, combined with the extraordinary waste and corruption that followed the discovery of natural gas, make the task of restoring Mozambique to its pre-gas growth path daunting. To date, Mozambique’s government has shown little inclination to try for reforms. Instead, it has opted to muddle through the current fiscal crisis without IMF or donor support, a situation that will not sit well with investors involved in the country’s gas development.
Much of the developing world, including many African nations, seems to have rounded the corner into middle-income territory. But Mozambique, with a per capita income in terms of purchasing power of just one-quarter that of India, is far from that defining moment.
Why? A wretched colonial experience? A no-holds-barred civil war complicated by cold war meddling? A disastrous experiment in socialism? International aid that for decades was largely counterproductive? Yes, yes, yes and yes. But many countries that were similarly benighted seem to be making progress. Mozambique, it seems, just can’t catch a break.
related topics: Development