How water became a casualty of Mozambique’s debt crisis

A woman pumps water into a bucket in Mozambique

One interesting aspect of doing fieldwork is that you get to understand some theoretical premises better. One such premise related to my PhD research is that the water/development nexus can only be properly understood when situated in the broader (national and global) political economy.

This became clear when in April of this year, I set foot in Mozambique at the start of a year-long field visit to study the Mozambican water supply sector – part of a project on governing the land-water-environment nexus in Southern Africa.

At the time I arrived in Mozambique, it was revealed that its previous government had contracted huge loans without disclosing it to parliament and donors. This proved to be the final push that plunged the economy of Mozambique into a crisis, while bringing relations between the government and donors to an all-time low.

Latest debts & crisis in Mozambique

The controversy had started when in early April, the Wall Street Journal published an article about loans worth over $1.4 billion that were lent by the banks Credit Suisse and VTB to two Mozambican state companies. One loan of $622 million was lent to Proindicus; another, worth $535 million, to Mozambique Asset Management (MAM). Both loans were meant for naval equipment and logistics for gas projects. They came on top of a third loan of $850 million lent by the same two banks to yet another state company, EMATUM, to pay for a tuna fishing fleet. Altogether, the loans added $2.3 billion of commercial debt to an already existing $9.9 billion of foreign debt.

This news had far-reaching impacts. Many of its donors, including the International Monetary Fund, World Bank and bilateral donors from the West, suspended planned loans or financial aid to the Mozambican government. Mozambique’s currency has since been in a slide, and is now only worth half its value against the dollar compared to a year ago. Foreign currency reserves have shrunk considerably, while inflation stands at 22%. The IMF and rating agencies have furthermore downgraded Mozambique’s credit rating, raising the costs of borrowing. All this came on top of politico-military tensions between the two major political parties, FRELIMO and RENAMO, and a severe drought in the south of Mozambique.

It was in this extraordinary context that I started my fieldwork, and I soon found out that the country’s water sector would not remain untouched by the unfolding crisis.

Impacts on the water sector

In particular, the suspension of financial aid to state entities has hit the water sector hard, given its major dependence on donors. In the short term, it simply meant that water supply projects were put on hold or planned projects were abandoned altogether. Many a water bureaucrat, moreover, diverted their time and energy from managing water projects to the question how to keep donors on board.

As for the donors themselves, they came to distrust any state entity that was receiving their aid. Some of them therefore now demand additional mechanisms that double check how their aid money is spent. Other donors change their aid modalities altogether, for instance by hiring an external organisation to manage funds on their behalf. This is likely to undermine previous progress in reducing the fragmentation of aid funded water projects by different development actors, which would have led to more integrative planning for the longer term.

I was also told about constraints related to imports of materials needed for upgrading or maintaining water infrastructure. Suppliers in Mozambique need foreign currency to import such materials, but with a quick decline of foreign currency reserves, the Bank of Mozambique is selective in who gets access to foreign currency. The supplier of the project I am investigating is refused this access, which means that it cannot purchase essential equipment, leaving many a water supply system to fall back on creative solutions to keep their systems going.

These are some examples of how the current crisis in Mozambique affects the water sector. Yet, from researchers of the Maputo based Institute of Social and Economic Studies (IESE), I have come to learn that the current crisis and its impacts are not so much exceptional as they are systemic.

The crisis and its impacts as trend, not an exception

To better understand this, we need to read the crisis from a broader political economy point of view. Mozambique’s economy is centrally organised around the large-scale extraction of natural resources, like coal and gas. These are extracted in mega-projects, which are typically the result of negotiations between multinationals and a domestic elite which uses the state as a vehicle for reaching their personal aims. The bulk of wealth generated either flows up north or is domestically accumulated for private gain, as a recent report on coal extraction in Mozambique shows.

Recently, these elite and state entities have discovered what incentives global finance can offer. With the extractive industry yielding little tax for the state budget, state actors have increasingly turned to emerging economies and global financial actors in search of financing public expenditures. Over the past 15 years, therefore, Mozambique’s debt has quickly gone up. In particular, commercial debt, with higher interest rates and shorter pay-back periods, has grown enormously, from $300 million in 2006 to some $5.5 billion in 2015. And a large share of these ‘public’ expenditures comprises big infrastructures that serve the very extractive industry which benefits a minority.

In light of this, the current crisis fits into a longer trend of rising debts, with a close bonding of domestic elites and global industrial or financial actors at its roots.

An article by Africa Confidential traces the obscure ways in which the Proindicus, EMATUM and MAM loans were contracted during the final years of former president Guebuza’s second and last term, and how the money was spent. Part of the money from these loans was redirected and used for the purchase of military equipment, while another part is generally believed to have filled the pockets of Frelimo elites standing close to Guebuza. But there is also the dubious role played by global financial actors. Credit Suisse and VSB persisted in lending big sums of money even though they knew, or should have known, about the doubtful legality of the loans.

The outcome is predictable, albeit contested: Mozambican society now has an additional $2.3 billion commercial debt to pay back, whilst the benefits are captured by global and national elites.

Water and development in Mozambique’s political economy

Like the crisis, we need to look at water and development in the broader national and global political economy. Looking at it this way directs our attention to structural impediments to development and sustainability, and it can help explain and tackle inequality, e.g. in access to water.

This broader perspective also helps in deconstructing arguments. I was told, for instance, that water supply services need to be outsourced to private operators so as to release pressure on the state budget and government resources. However, the state budget could have been much higher, and resources more plentiful, if multinationals had been properly taxed; austerity measures would not have been taken in response to a crisis caused in part by illegal debts or if corruption would be seriously tackled. That would leave other options than outsourcing a public service like water to the private sector, an experiment that has been tried before in Mozambique, but to little avail.

The crisis that coincides with my fieldwork makes me see such processes more clearly. But the crisis is a short term derivation of a more enduring system that tends to reproduce inequality. We therefore need not only to overcome the current crisis in Mozambique, but to simultaneously transform the very political economic conditions that have for too long hampered development in Mozambique.

About the author

Chris Büscher has been conducting fieldwork in Mozambique as part of his PhD and has received support from the Governing the Land-Water-Environment Nexus in Southern Africa, which funds research, visiting fellowships and exchanges through a grant from the ESRC (Economic and Social Research Council) and the National Research Foundation (NRF) of South Africa.