Mozambique’s salvation will come at a price

Good afternoon. President Daniel Chapo is trying to secure external support at a moment of acute economic pressure.

This week, his government signed financing agreements with the World Bank worth about $455m, and is also asking the same institution for direct budget support. IMF talks in Maputo are said by several sources to be going well, with some form of agreement possible soon. Chapo has built a useful relationship with World Bank president Ajay Banga, and the simultaneous presence of World Bank and IMF delegations in Maputo is no coincidence.

Mozambique needs liquidity, credibility and time. Floods, fuel costs, food prices and debt pressures have all tightened the fiscal position. Direct budget support would give the state more room to breathe than project financing alone. A new understanding with the IMF would help restore confidence after a difficult period in which the government has had to convince partners that it can manage spending, debt and reform.

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Of the two Washington institutions, the World Bank is, as ever, playing the softer role. It has often been the institution that keeps money flowing when others become more cautious. After the hidden debts scandal, the Bank provided a lifeline while direct budget support from other partners collapsed. Today, it is offering emergency liquidity and political reassurance while the IMF tests the fiscal numbers.

Any agreement with the IMF will still have conditions. They may be lighter than feared, and the government may present the outcome as a vote of confidence in Chapo’s administration. But Mozambique has not yet said what it is prepared to do on spending, subsidies, debt management, wage pressures or the pace of reform. If an agreement is announced this week, the devil will be in the details.