Mozambique to cut public expenditure by 10% – Finmin

Login

Register

http://www.clubofmozambique.com/

Mozambique to cut public expenditure by 10% – Finmin

7:38 CAT | 08 Jun 2016

The Mozambican government is taking immediate measures to cut planned public expenditure this year by 10 per cent, Finance Minister Adriano Maleiane told the country’s parliament, the Assembly of the Republic, on Wednesday.

Addressing a two day extraordinary sitting of the Assembly on the public debt crisis, Maleiane said these austerity measures “seek to compensate for the fall in revenue resulting from the slowdown in the economy which is forcing the government to revise downwards its forecast for economic growth this year from the initial seven per cent target to between five and six per cent”.

He insisted that the expenditure cuts “will not affect the social areas such as education and health or actions that seek to revive the economy through investments in agriculture and infrastructures”.

Instead, the government was “working on a package of incentives to stimulate national production, particularly in agriculture, poultry, fish farming and industry”.

One of the many headaches leading to liquidity problems for the state is that several of the country’s main international partners, including the International Monetary Fund (IMF) and the World Bank, have suspended financial aid because of the undisclosed guarantees given in 2014 by the previous government, headed by President Armando Guebuza, for the loans contracted by the companies Proindicus and MAM (Mozambique Asset Management) for US$622 million and US$535 million respectively.

Maleiane did not want the state budget to pay for Proindicus and MAM. The government had therefore told the management of these companies “to update their business plans, analyzing and exploiting all possible alternatives to make them viable, including strategic partnerships”.

He said that Proindicus was set up “to operate in integrated air, space, maritime, lake, river and terrestrial security”. It is owned 50 per cent by Mount Binga (a Defence Ministry company), and 50 per cent by GIPS (the business wing of the State Security and Intelligence Service, SISE).

A viability study had been undertaken, said Maleiane, which showed that the loan could be paid off in eight years, during which time it would bring in revenue of 1.7 billion dollars against operational expenditure of US$82 million (this figure seems extraordinarily low, since it suggests that Proindicus could raise revenue more than 20 times its expenditure. The same figure was given in Maleiane’s presentation to the parliamentary Plan and Budget Commission in May).

However, for Proindicus to make money, other companies have to buy its services, and to date none have done so. The hope had been that oil and gas exploration companies in the Rovuma Basin in the far north would buy security services from Proindicus. Maleiane admitted “the company has not yet closed its main service provision contracts”.

The loan carries an interest rate of the 12 month LIBOR (London Interbank Offered Rate) plus 3.75 per cent. The first repayment, of US$24 million, fell due and was repaid on 21 March.

As for MAM, Maleiane said this is 98 per cent owned by GIPS, one per cent by Proindicus and one per cent by the Mozambique Tuna Company (MAM). The company claims that a viability study shows that the loan can be paid off in eight years. It should produce gross revenue of US$490 million a year, for total operational costs of US$260 million a year, giving net revenue of US$230 million a year.

But so far there is no money, and MAM was unable to make the first repayment, of US$178 million, which was due on 23 May. Maleiane said the company was continuing to negotiate with its creditors for a restructuring of the loan.

The interest rate on the MAM loan, he added, is the 12 month LIBOR plus 7,739 per cent.

As for EMATUM, Maleiane said the successful restructuring of the debt extended the repayment period from five to seven years (to 2023). It has become a “bullet bond” whereby only the interest is paid until full maturity, when the capital is repaid in one lump sum. This brings some instant relief to the state budget in that repayment has been reduced from US$200 million to US$78 million a year. But this arrangement assumes that the government will have a source of income (presumably from natural gas sales) to pay off the capital in 2023.

The interest rate used to be LIBOR plus 6.5 per cent, and it is now just 10.5 per cent. Whether this deal is good for Mozambique depends entirely on what happens to LIBOR, which is a fluctuating rate. As of Monday the US dollar 12 month LIBOR rate was 1.2851 per cent.

The government last year divided the Ematum loan in two, saying the government would take responsibility for US$500 million, and the company for the remaining US$350 million. Maleiane said Ematum has now presented a new business plan to guarantee that it can repay the US$350 million.

Source: AIM