Lessons from the Mozambique meltdown

africa-meltdown-mozambique
In the 1980s film, Local Hero, the residents of an idyllic village on the west coast of Scotland start dreaming of the high life when rumours circulate that a Texas company has discovered oil. Some buy flashier cars while others make mental purchases of big houses or yachts. In the end, the Texan oil magnate, played by Burt Lancaster, decides the village is charming as it is and abandons the project.

The film is a gentle exploration of the resource curse. As in the fictional village, real governments are tempted to spend money prematurely. That is what happened in Mongolia, where a handful of mines contain enough gold, copper and coal to make everyone in the country a millionaire. In anticipation, the government built roads, raised salaries and dolled out subsidize mortgages. Today, with the commodities boom turned to bust, the economy is in ruins. In September, Mongolia asked the IMF for a bailout.

Anything Mongolia can do; Mozambique can do better. At least in Mongolia, some mines are producing. Mozambique has stumbled before a drop of the gas found off the northern coast has been pumped. The nation may one day be a leading exporter but projects will not come on stream before the 2020s.

That has not stopped Mozambique’s government splashing the cash. With the help of Credit Suisse and Russian lender VTB, it has raised more than US$2.2billion in commercial loans – no trifle for an aid-dependent country with a US$15billion economy and average per capita income of about US$1,000. Much of the money was borrowed secretly. Much of it was spent secretly, too, which is to say it has vanished. The US$850-million borrowed to build a tuna-fishing fleet was mostly squandered on military hardware.

In east Africa – where countries including Uganda and Kenya, have recently discovered oil or gas, albeit not in the same quantities – Mozambique’s meltdown raises two big questions.

First, what can governments do to avoid such mistakes? Sadly, there are few examples of best practice in Africa. Look at Nigeria and Angola, blessed with oil reserves but swimming in poverty and corruption, to see how easy it is to squander heaven’s bounty. Several Asian economies leap from poverty to wealth without natural resources.

Given that the resources are there, east African countries must figure out how to use them. Advice is easy to dish out but devilishly hard to follow. Build strong institutions that will not be corroded by an influx of cash. Sign contracts that bring long-term income. Invest profits to raise productivity, principally by spending on health, education and infrastructure. Diversify the economy. Put lots of the money into rainy-day funds for when commodities fall and in sovereign wealth funds for future generations. Above all, don’t steal the money, especially before it has arrived.

Mozambique appears to have fallen at hurdle number one. So the second question is how the international community should respond. Companies such as ExxonMobil will invest if there is money to be made. Still, they are subject to anti-bribery laws at home. Private banks can, and should, be punished by regulators and sued by bondholders if they have misled investors.

But what about donors and multilateral bodies? Should they be propping up a state dominated by a party that has spent much time dividing the spoils and little tackling poverty?

The IMF says it will not resume lending until an audit finds where the money has gone. But it should press for more, including punishment of anyone found to have stolen.

The IMF should insist on a credible government plan to use the gas windfall for the benefit of all Mozambicans, not just a self-serving elite. If that is not possible then, as in Local Hero, it would be better to leave the stuff in the ground.

Source: Financial Times

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