The government of Mozambique has issued a stark warning to it’s creditors warning that a debt restructure was essential in order for the country to recover. It revealed last week that the country would simply be unable to repay or even fully service it’s loans until the gas revenues it was expecting was available sometime after 2021.
It’s a grim picture for the South Eastern African nation – which expects public debt to reach an unsustainable level of 130% of GDP by the end of this year. The International Monetary Fund has offered it’s assistance in negotiating new terms with it’s creditors however direct aid was suspended after they discovered hidden loans of over $2 billion which were not declared.
As hidden debts go this was pretty spectacular, most of it had been built up by various state firms primarily to purchase various security and military equipment. These were ironically supposedly needed to protect the purchase from a previous secret loan which was used to buy a Tuna fishing fleet. All of these purchases and loans were kept secret from both investors and creditors alike.
The total of Mozambique’s debt doesn’t sound that much in the context of some Western countries but the total of almost $10 billion is way outside Mozambique’s ability to service. It is estimated that the country is able to manage a maximum repayment schedule of about $25 million a year, unfortunately it’s current liabilities require repayments of around $38 million dollars every single month.
Many analysts have previously promoted Mozambique as one of the safest investment opportunities in Africa for a variety or reasons. It’s politically very stable and has some good mineral reserves particularly a large amount of natural gas. The country had been experiencing some good growth levels however violent clashes in the North and the worldwide drop in commodity prices have stalled both inward investment levels and the overall economic growth which does still stand at about 3.7% however.
The debt crisis though threatens to halt the economic progress being made in Mozambique. Much of the country has benefited greatly from both the growth and the political stability. You’ll see a new professional middle class emerge in the cities, who purchase luxury good and utilize the improving internet infrastructure. Large media firms like Hulu and Netflix are available there although you’ll need a working Netflix VPN to access properly.
It’s a worrying time for the citizens of this beautiful African country, once more the promise of a better life and economy has been threatened by reckless mismanagement by the State. Hopefully the debt can be restructured in some way in order to allow the country to continue it’s growth story.
Many of the world’s economic problems are rooted in debt. Of course this takes many forms and there’s government Debt, residential debt and the debt that sits on company’s balance sheets with seemingly little issue. Debt isn’t necessarily bad, in fact it would be easy to argue than in today’s global economy it is almost impossible to be successful without acquiring some levels of debt either personal, corporate or national.
However there are times when the levels of debt in some scenarios just seem so incredibly large that it’s difficult to even comprehend that basis premise that these debts ultimately need to be paid back at some point. The US National debt is one of those incredibly scary figures which is so large it almost seems an irrelevance. You would guess that reducing it would be the cornerstone of any election promises but it appears that both the successful Trump proposals and the rejected democratic proposals would both have actually raised this figure. Of course, we’ll only see how the Republican plans pan out but it’s certainly a concern that reduction doesn’t seem to be even considered as a policy objective.
Some analysts have estimated that the democrat’s plans would have added about $200 billion dollars to the country’s debt which seems a huge increase. Until you look perhaps at the estimates of the Trump proposals which would apparently add a staggering $5.3 trillion dollars to the national debt. That would represent an incredible ratio – almost 105% of gross domestic product owed.
It’s easy to see where these figures would come from, Trump’s populist promise to slash taxes across the board obviously would cost billions at least in the short term. The corporate tax reduction would also incur huge costs but presumably this would eventually pay off in big rises in GDP as more companies are attracted to the low rate environment.
Indeed any rises in national debt in relation to policy changes need to be looked at in the context of the overall economy. If GDP starts to rise significantly these should eventually feed through to overall spending and the debt should start to fall again – it is however a huge risk.
Other parts of the policies would also incur a cost, investing in education raises debt again in the short term yet an educated work force is usually more productive and efficient. Badly motivated and educated people sitting at home watching TV claiming welfare isn’t going to help the economy. Although perhaps the shares in media firms like Netflix might improve despite the illegal downloading using anonymous torrenting techniques – see this article on this contentious issue. Unfortunately you also need to invest heavily in capital and infrastructure projects in order to create the employment needed.
Despite all the solutions to the global crisis seemingly involving more debt, it’s easy to see why people get uncomfortable with the current levels. It’s huge and the people in charge don’t seem to have any sort of idea how to reduce it – President Obama proudly claimed that federal spending has risen at the slowest level of any President over the last 60 years. That means it’s still heading upwards just not quite as quickly!
Author of BBC Blocked Abroad