How serious is Mozambique's financial crisis?

Mozambique’s international bonds tumbled earlier this week after a news report that the new government in Maputo is weighing a debt restructuring following months of post-election turmoil.

Below are some of the issues facing the resource-rich southern African country of 35 million people.

WHAT IS MOZAMBIQUE’S DEBT SITUATION?

Concerns about government finances have been mounting in recent years due to an Islamist insurgency in northern Mozambique that has delayed plans to develop huge gas fields.

Although Mozambique’s public debt-to-GDP, fell to 93.7% in 2023 from 100.3% the previous year, it is classified by the International Monetary Fund (IMF) as being at high risk of overall debt distress.

Its external debt-to-GDP ratio fell to 66.2% from 72.1% but frequent delays in the development of liquefied natural gas fields mean that it has to wait longer before its external debt service can benefit from those exports.

With total debt close to annual economic output, the government will have to embrace fiscal discipline.

HOW HAS POLITICAL INSTABILITY HURT STATE FINANCES?

Deadly protests flared up in October after the opposition accused the government of cheating in a presidential election won by Daniel Chapo, who extended the grip of the ruling Frelimo party that has been in power for half a century.

Chapo has said he is committed to improving Mozambicans’ welfare by boosting productivity and building a more inclusive economy.

The government lost 42 billion metical ($664.03 million) in revenues as a result of the economic disruption caused by the protests, newly-appointed Finance Minister Carla Louveira told Bloomberg. That left the government with little choice but to overhaul its domestic and dollar debts, the minister added.

Mozambique’s $900 million bond matures in September 2031 but it also has to clear external debt arrears, which stood at $1.2 billion at the end of 2023, the IMF said.

Relative calm has returned after months of violent clashes in which more than 300 people were killed, according to civil society groups.

Frelimo’s Chapo was sworn into office on Jan. 15 and made cabinet appointments, promising that social and political stability was at the top of his agenda.

But opposition leader and runner-up in the October election, Venancio Mondlane, who returned to Maputo from self-exile on Jan. 9, has called on supporters to continue demonstrations.

Chapo’s government has the upper hand in parliament, however, after Frelimo increased its majority to 195 out of 250 seats in the October polls.

WHAT DOES THE IMF SAY?

Mozambique is in the final phase of a three-year, $456 million IMF programme agreed in May 2022 that aims to support the country’s economic recovery and debt reduction.

The Fund, whose calculations and projections usually form the basis of any debt overhaul, said it was aware of the report of a potential restructuring but that it remained focused on its current programme with Mozambique.

Maputo and the IMF had started negotiations before the October election on a new funding programme but they were then put on hold pending the installation of a new government, the Fund’s resident representative told Reuters last month. It remains unclear when those talks might resume.

Chapo told Reuters in an interview after his inauguration that maintaining macro-economic stability was crucial, in order to make the country’s growth more inclusive by putting more money into the pockets of poorer Mozambicans.

Mozambique and the IMF have had strained ties in the past. The Fund suspended Mozambique’s access to financing in 2016 after the discovery of hidden debts linked to a “tuna bonds” scandal. The country later fulfilled the conditions set out by the Fund to regain access to financing programmes.

WHAT OTHER FACTORS AFFECT THE ECONOMY?

Like other countries in the region, Mozambique’s economy has been hit hard by climate change in recent years. Deadly cyclone Chido last month is expected to have hit economic output.