Mpumelelo Mkhabela

What we should learn about fiscal sovereignty from Mozambique

2017-03-03 10:21
Finance Minister Pravin Gordhan. (Photo: Gallo)

Finance Minister Pravin Gordhan. (Photo: Gallo)

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Since he was appointed finance minister after the catastrophic events of 9/12, Pravin Gordhan has emphasised the importance of South Africa’s fiscal sovereignty.

A fiscally sovereign country decides on how to raise revenue and spend money without taking instructions from outsiders. No country, however poor, enjoys the indignity of being told how to run its affairs. Fiscal sovereignty is intractably linked to political independence.

Gordhan warned recently that if South Africa borrowed more than it could afford to repay, we could find ourselves in the same position as other African countries knocking on the doors of the International Monetary Fund. In other words, we could lose our fiscal sovereignty and independent political decision-making. 

Gordhan has also spoken about the importance of keeping our budgeting processes, including raising of debt and providing debt guarantees to state companies, as transparent as possible. Nothing should be hidden in bags.

If anyone had doubted the sincerity of Gordhan’s warning, they should look across the Nkomati river for the effects of secret dealings and gambling on government debt. South Africans who support schemes to circumvent Treasury’s demand for transparency and prudence can learn a lot from Mozambique’s experience.

Mozambique, which has been on a path to economic recovery under the Frelimo government since 1994, has suffered a huge setback. Its dream of achieving fiscal sovereignty has been crushed thanks to the lack of transparency on its budget.

Since the war with Renamo technically ended, the democratic government led by Frelimo, the ANC’s liberation ally, began a reconstruction project. With no fiscal base, the government had no option but to rely on donor funding and expensive loans with lots of strings attached.

The early success of post-war reconstruction saw Mozambicans who were mostly exiled in South Africa returning home. South African commercial farmers and other investors moved across the border as democracy held the promise for stability and growth.

Unlike minnows Lesotho and Swaziland, Mozambique, a bigger country, was destined for growth and economic independence. Endowed with natural resources including gas fields and having access to the sea, Mozambique was going to be the next big thing in Southern Africa after Robert Mugabe destroyed Zimbabwe.

As economic growth averaged over seven percent annually, albeit from a low base, there was no doubt that the country of Samora Machel would one day make him smile in his grave. Poverty levels had begun to fall. Hope had begun to replace despair.

The growth, coupled with improved government revenues, gave the government space to borrow more to fast-track the recovery. More creditors were willing to invest in government debt. Confidence was returning to the country that was once infiltrated by the apartheid regime forces that hunted down South African freedom fighters like game.

But the road to recovery suddenly slowed down. Something went wrong. Without proper government controls, the recovery seems to have sowed seeds of its own destruction. 

A combination of reckless borrowing, weak governance systems, dodgy dealings between local officials who collaborated with international financiers, led to Mozambique defaulting on its debt. In the last two and half years, investor confidence plummeted as fast as the Metical, Mozambique’s currency.

The trouble began when it came light that a state-owned company had raised $850 million in bonds. The money was meant to be invested in tuna fishing, but was diverted to buy military equipment. Swiss bank Credit Suisse and Russian bank VTB were involved in arranging the state-guaranteed bonds on behalf of the Mozambique’s state-owned fishing company. 

It also emerged that other secret loans worth billions of dollars were arranged by the financial institutions on behalf of state companies. The IMF, Mozambique’s largest creditor, has demanded a full investigation and threatened to stop advancing much-needed loans to supplement the government’s budget. 

Multiple investigations are unfolding. Mozambique’s parliament has been investigating this matter for some time. The United States Securities and Exchange Commission has also launched its own probe. And Mozambique’s government has also hired international investigators. Former President Armando Guebuza, under whose leadership the loans were arranged, will have a lot to answer. 

Mozambique’s story is sad because so many of its citizens have never known peace and prosperity. The end of the war and the dawn of democracy offered hope. But now, its path to economic independence has been derailed by greed. An unseemly collaboration of local and foreign dealers has dented Mozambique’s image as a country that was slowly getting out of the IMF’s list of heavily indebted poor countries.

South Africa is different for several reasons. Firstly, unlike Mozambique, South Africa didn’t go through war. Although the democratic government inherited an almost bankrupt state, the economy was relatively sophisticated to make up for that and there was infrastructure to build on. 

Secondly, South Africa implemented a self-imposed structural adjustment programme, the infamous Gear policy, that reduced government debt until the budget reached a surplus. Credit ratings responded favourably, the cost of servicing debt declined and a huge social security net in the form of social grants was unleashed. 

The government still has space to exercise political choices free from outside influences. But if it heeds calls from some political circles to borrow more to fund expensive projects like nuclear, we could kiss goodbye fiscal sovereignty. Of course, the Kremlin will be too happy to give orders to South Africa. 

- Mpumelelo Mkhabela is a fellow at the Centre for the Study of Governance Innovation (GovInn) at the University of Pretoria.

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Read more on:    pravin gor­dhan  |  economic development  |  fiscal policy


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