“Unusual behaviour”

The Bank of Mozambique on Friday night announced a massive hike in its benchmark interest rates, as it struggles to bring inflation under control, and mop up excess liquidity.A statement issued by the Bank’s Monetary Policy Committee announced that the Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) will rise immediately by 600 base points, from 17.25 to 23.25 per cent.This is not quite the highest rate the central bank has ever charged. At one point in 2002 the Standing Lending Facility reached 32.5 per cent. But it subsequently declined, reaching 7.5 per cent in November 2014, and remaining at that level for a year. But rate rises in October, November and December 2015 and in February, April, June and July 2016 bought the rate to 17.25 per cent. The latest rise, to 23.25 per cent will certainly be imitated by the commercial banks, making the cost of borrowing prohibitively high for small businesses.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.In a departure from previous practice, the central bank will now allow each commercial bank to use the Standing Lending Facility only twice a week.Furthermore each commercial bank must report the exchange rates it is using in transactions with the public to the Bank of Mozambique three times a day. The central bank will make this information immediately available to the public.

Explaining this move at a Maputo press conference, the governor of the Bank of Mozambique, Rogerio Zandamela, said the decision had been taken to make exchange rates more transparent. “It will allow each of us, through the central bank, to know what rates each of the commercial banks is offering”, he said. “This will allow the central bank to discipline the market better”.If any “unusual behaviour” was noticed in setting exchange rates, the Bank of Mozambique would be able to intervene at once. But Zandamela insisted that the central bank has no intention of fixing exchange rates administratively.The exchange market “has been under constant pressure partly due to factors that are not directly related to economic fundamental, which makes the formation of exchange rates less transparent”.As for the increase in interest rates, Zandamela said that previously the benchmark interest rates had been negative in real terms. The purpose of the change was to make them positive, since, with negative real interest rates, the central bank cannot fulfil its role as a regulator “sending signals to the market”.The Standing Lending Facility had become negative in real terms because, in recent months, it had fallen below the rate of inflation and below other interest rates used on the inter-bank money market.Thus in September the weighted interest rates on transactions in treasury bonds with maturities of 91 and182 days were respectively 18.4 and 18.5 per cent, considerably more than the standing Lending Facility rate of 17.25 per cent.

Zandamela said the metical had continued to depreciate against the US dollar and the South African rand. At the end of September, the average exchange rate in the commercial banks was 78.48 meticais to the US dollar, a monthly depreciation of 6.8 per cent. The devaluation over the past year was 84.8 per cent.The metical’s slide against the rand was considerably more serious, since so much of the food consumed in Mozambique is imported from South Africa. The average exchange rate on the last day of September was 5.72 meticais to the rand – a depreciation of 13 per cent in the month and of 85.7 per cent since October 2015.The statement from the Monetary Policy Committee said the depreciation was the result of “the shortage of foreign currency caused by the suspension of direct support to the state budget and the balance of payments”. In April the International Monetary Fund (IMF), the World Bank and all the donors who once provided direct budget support suspended further financial aid in the wake of the scandal of the previously undisclosed government guaranteed loans to the security related companies Proindicus and MAM (Mozambique Asset Management). Aid is likely to remain suspended until there is an international, independent audit of these companies.

 

Also contributing to the shortage of foreign currency, the Bank added, was the reduced flow in foreign direct investment and the slowdown in Mozambican exports “within a framework of difficulty in financing the budget deficit, and of increased debt servicing”.These factors, plus the military instability caused by the low level insurrection waged by the Renamo rebels, all contributed to increased inflation. The yearly inflation rate, calculated from the consumer price indices of the three largest cities (Maputo, Nampula and Beira), reached 24.92 per cent by the end of September. Zandamela warned that, by the end of the year, the inflation rate could reach 30 per cent or higher.The public deficit was also worsening. Budgetary execution for the first half of the year showed a slight increase in revenue, but this was more than compensated for by the increase in public expenditure, resulting in an increased deficit, before and after grants. The state, Zandamela noted, “is resorting permanently to the use of Treasury Bonds”. This use of domestic debt “shows the fiscal pressures on the funding of public expenditure”.Zandamela put the excess liquidity in the commercial banks at over five billion meticais – without taking into consideration the bonds held by the banks, which could be converted into liquidity at any time. This threatened to put further pressure on the exchange rate and on prices – thus, the central bank’s decisions were in part intended to mop up excess liquidity.

The excess liquidity is distributed unevenly among the commercial banks. Asked if any of the banks might face a crisis similar to that which led the Bank of Mozambique to intervene the fifth largest bank, Moza Banco, at the end of September, Zandamela declined to answer, citing banking secrecy.As for Mozambique’s net foreign reserves, these continued to decline, falling to 1.69 billion US dollars at the end of September. This is only sufficient to cover three months of import (excluding the imports of the foreign investment mega-projects). Zandamela described this as a “critical level”.One of the few bright spots in the picture painted by Zandamela is that the deficit on the balance of trade in the first half of the year improved by over 40 per cent, when compared with the January-June 2015 period. Exports slumped by 15.6 per cent, but the fall in imports – 27.9 per cent – was much larger.Asked whether Mozambique would be able to meet its obligations on debt servicing falling due in January, Zandamela said that was a decision, not for the central bank, but for the Finance Ministry.

TENDER FOR MUEDA/NEGOMANO ROAD THIS YEAR

The Mozambican government intends, before the end of this year, to lunch an international tender for the repair and tarring of the 100 kilometre road from Mueda to Negomano in the northern province of Cabo Delgado.It is expected that improvements to this road will lead to a greater flow of people and goods across the Unity Bridge over the Rovuma River between Mozambique and Tanzania. This bridge has been grossly underused since it was inaugurated six years ago.Cited by the Maputo daily “Noticias”, the Cabo Delgado director of public works, Dino Coutinho, put no figure on how much rehabilitating the road will cost. However, he said that the African Development Bank (ADB) has already guaranteed funds for the first 50 kilometres, while the government is attempting to mobilize additional funding for the remaining 50 kilometres.The Unity Bridge was a dream of the founding presidents of the two countries, Samora Machel of Mozambique and Julius Nyerere of Tanzania. It was finally inaugurated by two later presidents, Armando Guebuza of Mozambique and Jakaya Kikwete of Tanzania, in 2010.The bridge cost 35 million US dollars, provided entirely from the Mozambican and Tanzanian state budget. But use of the bridge has been disappointingly low, largely because of the poor state of the Mueda/Negomano road. The intention to rehabilitate and tar the road has been announced on several occasions, but has always been postponed. 

EMBRAER GUILTY OF BRIBING OFFICIALS

US Assistant Attorney General Leslie R. Caldwell announced on Monday that the Brazilian aircraft manufacturer Embraer has agreed to pay a penalty of more than 107 million US dollars in connection with schemes involving the bribery of government officials in Mozambique, the Dominican Republic, and Saudi Arabia, and to pay millions more in falsely recorded payments in India via a sham agency agreement.

“Embraer paid millions of dollars in bribes to win government aircraft contracts in three different continents,” said Caldwell, in a statement issued by the US Justice Department. “But this prosecution shows that the Criminal Division (of the Justice Department) will hold accountable those who treat corruption as a mere cost of doing business”. The investigation was the joint work of the US, Brazilian and Saudi authorities. “Bribe payers and bribe takers alike have been brought to justice for their wrongdoing,” declared Caldwell.“Embraer tried to bribe their way into several profitable aircraft contracts around the world,” said the Assistant Special Agent in charge of the case, William Maddalena. “Instead of reaping a nice profit, their criminal conduct earned the Brazilian aircraft manufacturer a substantial penalty that more than wiped out their gains from these contracts. Crime does not pay!”Under questioning, Embraer admitted that its executives had bribed foreign government officials and had falsified records in connection with aircrafts sales in several countries. The Mozambican connection was a bribe of 800,000 dollars paid via what the Justice Department describes as “a false agency agreement with an intermediary designated by a high-level official” in Mozambique Airlines (LAM). The purpose of the bribe was to secure LAM’s agreement to purchase two aircraft from Embraer for approximately 65 million dollars. So the Mozambican public now knows the real reason why there are Embraer aircraft in LAM’s fleet.Other crimes that Embraer admitted to include a bribe of 3.52 million dollars to a government official in the Dominican Republic to secure a contract to sell the Dominican Air Force eight military aircraft for approximately 92 million dollars, and a bribe of 1.65 million dollars to an official at a Saudi Arabian company to secure the purchase of three Embraer aircraft for about 93 million dollars. Embraer earned profits of nearly 84 million dollars on the aircraft sales secured by bribes. Those profits have been wiped out by the 107 million dollar payment.The Justice Department says that Embraer entered into a three-year deferred prosecution agreement (DPA) to resolve the case. As part of the DPA, Embraer admitted to its involvement in a conspiracy to violate anti-bribery and books and records provisions and to its ”willful failure to implement an adequate system of internal accounting controls”. The full cost to Embraer of these cases is much higher – the company has also reached a settlement with the US Securities and Exchange Commission which will cost it over 98 million dollars, and it will pay the Brazilian authorities 20 million dollars.The Brazilian authorities have charged 11 individuals for their alleged involvement in Embraer’s misconduct in the Dominican Republic, while the Saudi authorities have charged two individuals for their alleged involvement in Embraer’s misconduct in Saudi Arabia.

Nobody has been charged in Mozambique, and the LAM official involved has so far not been named.Court documents cited by the Bloomberg agency say that the initial bribe offered by Embraer to secure the Mozambican purchase was between 100,000 and 160,000 dollars. This was rejected as far too low. “It would have been less insulting to give nothing,” the unnamed Mozambican official told an Embraer executive, according to the court documents. The official suggested a bribe of a million dollar, but apparently settled for 800,000.Embraer has issued an apology. “The company acknowledges responsibility for the conduct of its employees and agents according to the facts ascertained in the investigation,” Embraer said in a statement. “Embraer deeply regrets this conduct. The company has learned from this experience and will be stronger as it moves forward.”

HREE DEAD IN STORM

Three people died in Maputo on Monday night, and a further ten were injured, when a major electrical storm hit the city.The victims were travelling in a minibus along the Maputo coast road when a tree was blown on top of the vehicle.High winds and heavy rain accompanied by hail, thunder and lightning, characterized the storm, which blew roofs off houses, uprooted trees, and knocked down lampposts and billboards. Roads were flooded in parts of the city, particularly in the downtown area, where the storm drains were blocked, thanks to the Municipal Council’s failure to keep them clean.The storm caught motorists by surprise since it had not been forecast by the National Meteorology Institute (INAM). The flooding and fallen trees led to traffic chaos, and thousands of people, returning home after a day’s work, were stranded at bus stops. Many drivers of the minibus-taxis, known as “chapas”, which provide much of the passenger transport in the city, took their vehicles off the roads, rather than drive through the storm.INAM now says that the storm was due to a system of low pressure crossing southern and central Mozambique, particularly along the coastal strip. Bad weather and high temperatures are forecast to continue for the next few days.

CONTAINERS OF LOGS SEIZED IN NACALA

The Mozambican customs authorities have seized 11 containers of logs that were about to be exported illegally to China from the northern port of Nacala, according to a report on the independent television station, STV. The owners of the logs declared that the containers were full of raw cotton. Apparently nobody at the port bothered to check, and the containers did not pass through the electronic scanners – for eight of the containers had been loaded before the fraudulent operation was discovered.

The logs are of red sandalwood, a protected species, and the containers, loaded with 480 cubic metres of logs, were transported to Nacala by rail. According to the customs service, the timber was being smuggled, not from Mozambique, but from Malawi.The matter is now in the hands of the Public Prosecutor’s Office and the Customs Tribunal, which will decide the final destination of the logs.This is the fifth seizure so far this year in Nacala of goods that were being smuggled out of the country under false pretences.The first seizure was of Mozambican cashew nuts. To avoid the payment of the surtax charged on exported raw nuts, the owner had declared that the cargo consisted of beans.

“And nowadays what happens?”

The former Minister of State Administration, Oscar Monteiro, on Wednesday warned that some leaders in today’s Mozambique choose to appoint less skilled people who will not outshine them, according to a report in Thursday’s issue of the independent daily “O Pais”.Monteiro, who was giving a lecture in Maputo on the life and work of the country’s first President, Samora Machel, recalled that Machel deliberately surrounded himself with the best people available – but some of today’s leaders prefer to choose cadres who are weak.Monteiro, who was a member of the Frelimo Political Bureau under Machel, said “Samora knew how to gather the best around him. I ask you: do we let ourselves be surrounded by the best, or do we call on those who will not put us in the shade?”

“There are people who think they should not have near them people who are more skilled than they are, because this will expose their weaknesses”, he added.Monteiro attacked those who use their positions inside the state to feed their private business interests.“The assets of the state must be defended because they belong to all of us”, he said. “There are people who have the knack of being rich. Fine – but let them do their business outside. Using their position in the state for business to their own benefit is to be condemned”.“This is becoming a disease which does not allow the State to stand up straight, and it’s no longer a hidden disease. It’s in the faces of all of us, because the people who do this sort of thing need to show it off”, he accused.

Monteiro said that Samora Machel kept a distance between himself and the state’s money. State property was sacrosanct “and once, when somebody, on changing his residence, took some state goods with him, Samora called a meeting, and said the goods belonging to the State must not be privatized”.Machel was never involved in questions of money, Monteiro recalled, “and in his speeches, he used to say ‘if you see me become rich, ask me where the money comes from’”

“And nowadays what happens?”, Monteiro asked his audience.

CLOSE TO ACQUIRING SHARES IN ROVUMA BASIN

The American oil company ExxonMobil is close to closing the deal to buy shares in offshore Area Four of the Rovuma Basin, off the coast of the northern Mozambican province of Cabo Delgado, where large quantities of natural gas have been discovered.According to Oscar Mitha, chairperson of Mozambique’s National Hydrocarbon Company (ENH), ExxonMobil will not enter Area Four as a minority shareholder. Speaking to reporters on Thursday during a National Business Forum held by the Confederation of Mozambican Business Associations (CTA), Mitha said the American company “will at least be on a footing of equality with another partner”.That partner can only be the Italian energy company ENI, which is currently the operator of Area Four. ENI-East Africa holds 70 per cent of the shares in Area Four. This company is 50 per cent owned by ENI itself and 20 per cent by the China National Petroleum Corporation (CNPC). Galp Energia of Portugal, Kogas of South Korea, and ENH itself each hold ten per cent of Area Four.With the negotiations currently underway between ExxonMobil and ENI, Mitha believed that the American company would become the Area Four operator. The share purchase will result in a very substantial payment of capital gains tax to the Mozambican exchequer.Mitha thought this was encouraging news, given the huge financial capacity of ExxonMobil, and its dominant position in the hydrocarbon position. 

A major investment by ExxonMobil could attract other companies to Mozambique.Cited in Friday’s issue of the independent daily “O Pais”, Mitha dismissed claims that ExxonMobil would only buy shares in order to sell them later at speculative prices. “All development of these areas is done through binding development plans”, he said.Mitha was confident that ENI will announce its Final Investment Decision for Area Four in November, or at the latest in December.
As for the Texas-based company Anadarko, which is the operator of the adjacent Rovuma Basin Area One, Mitha said its Final Investment Decision should be announced in the third quarter of 2017.“We have to prepare ourselves, because the third quarter of 2017 is tomorrow”, he added. “It may seem a long way off, but it isn’t. The sooner we stop talking and go into action, the better it will be for us”. ENI and its partners intend to produce liquefied natural gas (LNG) from a floating LNG plant installed above the Coral South gas field. Anadarko’s plans include building an onshore LNG factory in the Afungi Peninsula, in Mozambique’s northernmost district of Palma.Earlier this month, ENI and its partners signed an agreement in London to sell LNG to BP Poseidon, a company fully controlled by British Petroleum (BP). The contract with BP covers the sale, for a period of more than 20 years, of all the LNG that will be produced at the Coral South facility. This floating factory will have the capacity to produce over 3.3 million tonnes of LNG a year.

VTB says it was deceived by Mozambique over loans

“The government deceived us” by not disclosing the debts with state guarantee contracted by various public companies in 2012 and 2014, said the vice president of Russia’s VTB bank about the loan to Mozambique.In an interview with Bloomberg news agency, Yuri Soloviev, head of VTB Capital and first deputy chief executive officer of VTB Group, said the institution had been deceived because the state-guaranteed debts of several public companies were not disclosed to investors and the International Monetary Fund (IMF) by the government of Mozambique.Soloviev said that VTB was no longer the holder of the debt, but that it had not abandoned investors “since we are responsible, as agents of the loans and in the issuance of foreign-currency debt “.VTB and Credit Suisse both helped restructure the Mozambican debt, but the operation was kept undisclosed by the Mozambique government until April 2016, when the Minister of Economy and Finance acknowledged the debt druing the IMF Spring  Meetings in Washington.The IMF, the World Bank and several countries then suspended the financing of projects in Mozambique, giving rise to the current economic and financial crisis. 

Yuri Soloviev (first sitting from the left) listens to Russian President Vladimir Putin deliver a speech during the annual VTB Capital “Russia Calling!” Investment Forum in Moscow, Russia, October 12, 2016.

CONTINGENCY PLAN

The Mozambican government on Tuesday approved the Contingency Plan for coping with any natural disasters that may occur during the 2016-2017 rainy season.Speaking to reporters after the weekly meeting of the Council of Ministers (Cabinet), the government spokesperson, Deputy Health Minister Mouzinho Saide, said the purpose of the plan is to reduce loss of life and material damage caused by extreme weather events during this period.The plan will also ensure humanitarian assistance to those in need until normal conditions are re-established. As in previous years, the Contingency Plan envisages three scenarios. The minimum scenario envisages storms with high winds, localized flooding in towns and cities, and drought in some parts of the country. Under this scenario, about 714,000 people could be affected.The second scenario, regarded as the most probable, combines these events with flooding on river basins in the northern provinces of Nampula, Cabo Delgado and Niassa, and in Tete and Zambezia in the centre of the country.

 If this happens, about 1.35 million people would be at risk.The final, and worst scenario adds the possibility of flooding on the main rivers in Sofala and Inhambane provinces, which would push the number of people affected up to 1.37 million. If the widespread flooding envisaged in the second and third scenarios occurs, it will probably be in the first quarter of 2017, said Saide (January and February are usually the wettest months in Mozambique). The problem facing the government is that it does not yet have the money required to deal with even the least severe of the scenarios. Scenario one would cost 597 million meticais (7.75 million US dollars, at current exchange rates). Scenario two would cost 810 million meticais, and scenario three 930 million.“The government has already mobilized some of the money needed to cover this Contingency Plan”, said Saide, “but it will certainly need to mobilize more resources through the participation of its partners”.So far, the money available from the State Budget for the Contingency plan is just 160 million meticais.

BRAZILIAN FUNDING SUSPENSION

Brazil’s National Economic and Social Development Bank (BNDES) announced on Tuesday that it has suspended funding for projects of 25 companies under investigation for corruption, including construction work in Mozambique and Angola.The Brazilian companies are being investigated under Operacao Lavo Jato (Operation Car Wash), an investigation undertaken by the Brazilian Federal Police into allegations of money laundering and corruption. BNDES names the companies concerned as Odebrecht, OAS, Queiroz Galvão, Camargo Corrêa and Andrade Gutierrez.According to a report carried by the Portuguse news agency Lusa, the main project in Mozambique at risk of losing its funding is the Moamba Major dam, on the Incomati river in Maputo province, which would have received 320 million US dollars via BNDES. The total cost of the dam is put at 466 million dollars. 

When built, this dam will be able to store 760 million cubic metres of water and control flooding in the Incomati valley. The dam would facilitate irrigated agriculture, and would also contain a power station capable of generating 15 megawatts of electricity. The work was to have been concluded by late 2019.The Brazilian company hired to work on Moamba Major is Andrade Gutierrez. The first stone was laid in November 2014 at a ceremony attended by the then president, Armando Guebuza, but construction of the dam proper did not start until May 2016. By late June of this year, work on the dam was said to be seven per cent complete. The 25 projects affected by the BNDES suspension of funding cost a total of over seven billion US dollars, of which 2.3 billion has already been paid out. In addition to Moamba Major, the BNDES move affects four projects in Angola, seven in Venezuela, seven in the Dominican Republic, two in Argentina, and one each in Cuba, Ghana, Guatemala and Honduras.BNDES funding of infrastructure projects outside of Brazil has been shrouded in suspicions of over-invoicing and of favouritism to certain companies. BNDES has drawn up new criteria for financing exports of engineering and construction services taking into consideration recommendations made by the Accounts Tribunal, arising from its audits.

Fuel prices rise

The Mozambican government has increased the price of fuel by between 5.3 and 40.3 per cent, taking effect as from Saturday.Owners of petrol driven cars are let off fairly lightly. In the new price table issued by the Ministry of Mineral Resources and Energy, the price of a litre of petrol rises from 47.52 to 50.02 meticais, an increase of 5.3 per cent. But if the price is expressed in foreign currency, petrol is much cheaper than it was a couple of years ago, thanks to the sharp depreciation of the metical.In 2014, when expressed in US dollars, the price was about 1.6 dollars per litre. Today it is just 66 US cents per litre. Because of the exchange effect, fuel had become cheaper in Mozambique than in neighbouring countries, and so Zimbabwean motorists have been driving across the border to buy petrol from Mozambican filling stations.The price of diesel rises by 24,5 per cent, from 36.81 to 45.83 meticais a litre, while a litre of kerosene now costs 33.06 rather than 28.64 meticais, an increase of 15.4 per cent. Imported cooking gas rises in price by 5.6 per cent, form 55.45 to 58.54 meticais a kilo. But the sharpest increase is for compressed natural gas, where the price shoots up by 40.3 per cent, from 17.75 to 24.9 meticais a kilo.The price rise was announced in the early evening of Friday, leading to long queues at Maputo petrol stations, as motorists rushed to fill up their tanks at the old price. This is the first rise in fuel prices since 2011.