Maputo — The International Monetary Fund (IMF) on Tuesday welcomed the recent decision by the Bank of Mozambique to hike interest rates in order to slow down the growth in the rate of inflation.
Speaking in Maputo, where he presented an IMF report on recent economic developments in su-Saharan Africa, the Fund’s representative in Mozambique, Ari Aisen, described the central bank’s measures as “courageous”.
The Bank of Mozambique’s Monetary Policy Committee announced on 21 October an immediate increase in the Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) by 600 base points, from 17.25 to 23.25 per cent. The Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) also rose by 600 base points from 10.25 to 16.25 per cent.
The Compulsory Reserves Coefficient – the amount of money that the commercial banks must deposit with the Bank of Mozambique – which had been divided into two, for local and for foreign currency, has now been reunited, and stands at 15.5 per cent for all currencies, For deposits in local currency, the metical, that is an increase of 250 base points, while for deposits in foreign currency the increase is only 59 base points.
Aisen said these measures were correct to control inflation. “There’s an effort on the fiscal side”, he said. “On the monetary front, there’s been an increase in the compulsory reserves” – and such measures were key “to mop up excess liquidity”.
“The central bank understood that monetary policy needed to take a stance that confronted the rise in inflation”, he added. “I think the Bank of Mozambique recognized that it had to take measures to deal with inflation”.
Aisen’s only criticism was that the measures had come rather late, and so were tougher than would have been the case had the bank acted in good time. (The delay, however was almost certainly due to the appointment of a new governor, Rogerio Zandamela, a former IMF official. There was a hiatus of three months between the last meeting of the Monetary Policy Committee chaired by the then governor, Ernesto Gove, and the first meeting chaired by Zandamela).
Aisen added that the solution to the current economic crisis involves the implementation of structural reforms, improvements in the planning of public investment, strengthening the capacity to analyse fiscal risk, and prudent management of the public debt.
Meanwhile, some of Mozambique’s creditors have formed a “creditors’ committee”, after taking alarm at last month’s warning by the Minister of Economy and Finance, Adriano Maleiane, that the country’s current debts are unsustainable and must be restructured.
The “creditors’ committee”, according to a report from the Reuters news agency was formed by 60 per cent of the holders of Mozambique’s 2023 Eurobond.
This is what remains of the bonds for 850 million dollars issued in 2013 by European banks (notably Credit Suisse and the Russian bank VTB) on behalf of the Mozambique Tuna Company (EMATUM).
This debt has already been restructured once. In early April, the government on Tuesday ratified the deal under which the securities issued by EMATUM were replaced by sovereign government bonds with a longer repayment time, but at a higher interest rate. This was only possible after the great majority of the bondholders – 81.5 per cent – had agreed to the swap.
The proposal accepted by the bondholders was that the EMATUM bonds (now down to 697 million dollars, after the first repayments) would be swapped for government bonds for 585.5 million dollars that mature in 2023. The interest rate, however, shoots up to 10.5 per cent. (The initial rate had been LIBOR (London Inter-Bank Offered Rate) plus 6.5 per cent).
For the government, the advantage was that it would not have to repay the capital until 2023. Until then it will only be obliged to make annual interest payments. The government’s assumption was that by 2023 revenue will be flowing in from the vast natural gas fields in the Rovuma Basin, off the coast of the northern province of Cabo Delgado.
The deal gave the government an extra two years to repay, and the yearly burden on the treasury fell from 200 million dollars to about 76 million.
But this deal was reached before the full scale of Mozambique’s indebtedness became clear, and before it was common knowledge that Credit Suisse and VTB had, with Mozambican government guarantees, lent a further 1.1 billion dollars to two more quasi-public companies, Proindicus and MAM (Mozambique Asset Management).
Ematum, Proindicus and MAM pushed Mozambique’s debt over the threshold of sustainability. When, on 25 October, Maleiane presented the true situation to a meeting of creditors in London, he admitted that it was impossible to repay the debt on the current servicing programme.
The figures in the government’s document showed that debt service, including arrears, is 675.2 million dollars this year, rising to 803.8 million dollars in 2017, 826.8 million in 2018 and 865.5 million in 2019. From 2017 to 2019, easily the largest slice of the debt service goes on the EMATUM, Proindicus and MAM loans – this will be 591.2 million dollars in 2017, 377.3 million in 2018, and 359.8 million in 2019.
The government is thus looking for an agreement with creditors that will bridge the gap between now and 2021, when the revenues from the Rovuma gas fields should be flowing. It wanted to reach agreement with the creditors “on terms compatible with IMF debt sustainability criteria as soon as possible”. It suggested an agreement in principle with creditors on a “debt resolution proposal” by December, and in January the agreed debt resolution strategy would be implemented.
The Ematum bondholders were taken by surprise. In their statement on setting up the creditors’ committee they said that other commercial and multilateral lenders ought to be first in line to provide debt relief.
“The formation of the GGMB (Global Group of Mozambique Bondholders) was triggered by Mozambique’s surprise announcement on October 25, 2016 that it intends to seek a restructuring of the entirety of its external commercial debt, including the 2023 bonds that creditors agreed to restructure only six months ago,” their statement said.
They have no intention of negotiating now, and demanded that negotiations with the government should only begin once an independent debt audit had been completed and published.
This refers to the audit of Ematum, Proindicus and MAM that will be undertaken by the company Kroll, regarded as the top forensic auditing company in the world. Kroll has been given 90 days from signing its contract to deliver the audit.
If the bondholders stick to their current position, negotiations with the government could not start before February, at the earliest.