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Strangling Mozambique
International Monetary Fund
"Stabilization" in the
World's Poorest Country

by Joseph Hanlon

MAPUTO, MOZAMBIQUE -- Alarmed that the International Monetary Fund (IMF) is shattering the fragile economy of the world's poorest country, foreign governments, conservative bankers, Catholic church leaders, local economists and even some World Bank officials are all pressing for an alternative to harsh IMF "stabilization" in Mozambique. So far, the IMF not only refuses to blink, but appears to be turning the screws tighter to punish the impoverished country for having the temerity to openly question Fund policy.

Until 1992, Mozambique was a Cold War battlefield. A particularly brutal, decade-long war killed one million of Mozambique's 15 million people and inflicted $20 billion in damages; it left Mozambique with a pitiful per capita GDP of less than $100. Renamo rebels, with the open backing of apartheid South Africa and right-wing U.S. businesspersons, and with covert U.S. government approval, destroyed 60 percent of the nation's primary schools, half of all health posts and half of all rural shops. One of every three families was forced to flee their homes at least once during the decade-long war.

With the end of the Cold War, a settlement was arranged in 1992. Unlike in Angola, peace held in Mozambique, where citizens were exhausted by a war that few regarded as their own. Multi-party elections took place in 1994. The previously ruling Frelimo party was re-elected, while Renamo became the main parliamentary opposition.

People flooded home as soon as the shooting stopped. In two years, 1.7 million refugees returned from neighboring countries and a comparable number of internal refugees went home to their farms.

But peace did not bring prosperity or end hunger. The government Poverty Alleviation Unit estimates that poverty has increased since the end of the war; and the high war-time levels of chronic malnutrition have not fallen with peace.

The cause of the ongoing suffering is IMF-imposed stabilization policies. As conditions for ending the civil war, the United States forced Mozambique to join the IMF and World Bank 1984 and then to impose a modified form of World Bank-mandated "structural adjustment" in 1987. That was not enough, however, and in 1990 Mozambique had to accept the much harsher IMF-controlled "stabilization." By then, Mozambique had also become the most aid-dependent country in the world; with the end of the Cold War and the end of East bloc assistance, virtually all foreign aid is "conditional" on obedience to IMF and World Bank demands. So Mozambique must continue to toe the line.

The IMF has argued that inflation must be controlled at all costs, and that post-war reconstruction should be deferred because it is inflationary. As inflation has risen each year after the war, the IMF has imposed tighter conditions. Most outside of the IMF viewed the policy as mad, because the war had left virtually no economy to stabilize. Most donors and Mozambicans have stressed the need to rebuild the devastated economy and increase production. But so far, the IMF has prevailed in choking off growth, and rebuilding has been deferred indefinitely.

"Mozambique is threatened politically, economically and culturally. The main threat is the World Bank and IMF, who represent the rich countries -- the G7," says Dom Manuel Vieira Pinto, Catholic Bishop of the northern city of Nampula. "The international community is creating a new type of colonialism; we have gone from one colonialism to a much stronger one -- economic colonialism. At least the old colonialism had a face; this one does not."

Roller coaster economy

Mozambique's economy has been on a roller coaster for three decades. In the early 1970s, the country enjoyed subsidies from South Africa as part of the "white front" against newly liberated African nations. However, following a 1974 coup in Portugal that ended fascism in that country, the Portuguese abandoned Mozambique, sabotaging machinery and killing livestock as they departed.

The victorious Frelimo liberation movement took over the government at independence in 1975 and halted the economic collapse by 1977. Frelimo declared itself Marxist-Leninist and returned the now planned economy to pre-independence levels by 1981.

But the 1980 U.S. election of Ronald Reagan intensified the Cold War, and South Africa began to launch attacks on Mozambique in 1981. By 1984, the war had devastated the country.

In 1987, in an effort to curry favor with the United States, Mozambique introduced its own modified structural adjustment program, including major currency devaluations, a liberalized market and curbs on government spending and money supply. Nonetheless, investment was still directed to the productive sector, foreign trade was regulated and few government enterprises were privatized.

Frelimo's "turn to the west" was not enough to satisfy the United States, however, and the war intensified. But it did trigger a big increase in aid -- which poured in from social-democratic European nations, as well as, ironically, from the United States -- to bandage Mozambique's gaping wounds. But no Western country was prepared to stand up to the United States and demand an end to the killing. By 1990, Mozambique was the biggest aid recipient in sub-Saharan Africa, receiving more than $1 billion a year.

The IMF and World Bank were unhappy with Mozambique's home-grown adjustment policies, and it became clear to Frelimo that winning over U.S. policymakers who had the power to end the war required total obeisance. In 1990, Mozambique accepted a full-blown stabilization and adjustment package. By 1995, the IMF called Mozambique a "strong adjuster," a designation applied to only 14 countries in sub-Saharan Africa.

Perverse results

Stabilization brought dramatic and perverse results. During Mozambique's own adjustment program in the 1980s, significant growth occurred despite the war. Per capita GDP rose from $87 in 1986 to $108 in 1990; industrial production and exports more than doubled during this period. Inflation fell from 176 percent in 1987 to 33 percent in 1990.

By contrast, once IMF stabilization was imposed, GDP per capita, industrial production and exports all fell dramatically. The IMF's stated objective was to curb inflation, even though it had been falling steadily. Once the IMF took charge, however, it rose from 33 percent in 1990 to 70 percent in 1994.

The two most important controls imposed by the IMF were cuts in government spending and cuts in credit to the economy. Government salaries fell dramatically. A doctor earned $350 a month in 1991, $175 in 1993 and now takes in less than $100 a month. For a nurse or teacher, monthly salaries fell from $110 to $60 to $40 -- not enough to support a family. Corruption rose rapidly as people sought extra money to survive; teachers demanded that pupils pay for extra lessons, while women arriving at maternity hospitals to give birth needed to bring a dollar or two to pay the midwife.

Total credit to the economy was savagely cut, and by 1995 was one third the 1990 level. The credit crunch crippled productive sectors of the economy, particularly agriculture and industry, which faced interest rates of 44 percent.

The donor package

The IMF has not imposed its stabilization policies in isolation. The World Bank is simultaneously imposing adjustment, which involves privatization and ending all subsidies and trade restrictions. Part of the joint package is rapid devaluation and high interest rates.

These features are all common to the cookie-cutter stabilization and adjustment programs that the IMF and World Bank impose worldwide. What is different about Mozambique is that it is just coming out of a war and, as well as being the poorest country in the world, it is also one of the most aid dependent.

This dependency creates a strange mix in which donors call the tunes. Virtually everything is done through aid projects. To turn on the lights, the Ministry of Agriculture needs aid money. Donors buy up the best people -- most engineers will not work for the government for $100 a month when they can earn 20 times that much working for a donor. Mozambique now has about 3,000 foreign aid workers employed by the United Nations, World Bank, bilateral donors and non-government organizations. Often they simply fill gaps caused by other donors having hired Mozambican technicians at high salaries.

The enormous aid industry fuels a dollar economy unaffected by rapid devaluations. This new Mozambican and foreign elite -- beneficiaries of the enclave dollar economy -- expect European lifestyles, and shops and restaurants in Maputo now cater to this.

The growth of the dollar economy is linked to trade liberalization and the credit squeeze. It has become easier and more profitable to import goods than to make them. With the credit squeeze, banks cannot supply the demand for loans. Bankers prefer to loan what money is available on a short-term basis to Maputo traders rather than to higher-risk farmers. In June 1996, it was revealed that the biggest bank in the country, the state owned Commercial Bank of Mozambique (BCM), would not provide any credit for agricultural marketing this year because it was being prepared for privatization and would not make any risky loans.

Meanwhile, donors increasingly channel their aid toward imports rather than support of domestic production. Maputo has 2,116 registered import-export businesses -- four times the number of businesses that produce export products.

The import-preference cycle is completed by corruption. The IMF prohibits the government from paying living wages. Customs officials take bribes to allow goods to enter duty-free, giving these products a competitive advantage over locally made goods on which domestic taxes have been paid. (In this ideological hall of mirrors, the IMF and World Bank have said that the solution to this problem is to privatize the customs administration, because a private company, free from IMF dictates, could pay higher wages and commissions to the same staff.)

The final part of the package is the IMF's restrictions on post-war reconstruction on the grounds that this would be inflationary, and inflation must be contained before reconstruction can begin. In rural areas, four years after the war, many roads remain closed because the government roads department is starved of funds and few donors are interested in the glamorless task of building or repairing rural dirt roads.

Most of the 3,000 rural shops destroyed by Renamo remain closed, because shopkeepers lack credit. Last year, in some areas, peasants who had returned to their old farms could not sell their crops, because no one would buy -- due to lack of shops and roads, but also because the credit squeeze meant smaller traders could not obtain working capital. This year, the best maize crop in more than a decade has been forecast, but most of it will never be sold.

IMF stabilization has brought prosperity to a few, however. The streets of the capital, Maputo, are full of new luxury four-wheel-drive vehicles. There is a building boom of expensive houses. Shops sell imported electronic goods. Maputo's first pet shop has just opened. Four new banks have opened, and more are planned.

The Maputo boom highlights the three most dramatic impacts of stabilization and adjustment -- sharp increases in wealth inequality, an urban bias and a major shift from production to trade.

Who benefits

Several distinct elite interests have benefited from the stabilization policies that have further impoverished most Mozambicans. They are: large Mozambican trading companies, a new Mozambican aid and comprador group, white South Africans and foreign companies.

Several of the large trading companies are descendants of Portuguese establishments from the colonial era. The Mozambique Company, for example, controlled a large part of the colony for three decades; it is now a major trading company called Entreposto. These large, self-financed firms do not need credit and are monopolizing commerce in the rural areas they choose to serve; they are also moving into plantation agriculture.

Asian traders, originally brought in to run rural shops by the Portuguese colonizers to prevent black Mozambicans from running businesses, are also an ascendant power. These merchants moved into the cities after independence, and with family links throughout the region, they dominate the import trade. They have become major users of the available short-term bank credit.

Of the professional classes, only those paid dollar-linked salaries do well; all the others are being pushed into poverty. Dollar-linked salaries -- either indexed or paid directly in dollars -- are only available from foreign companies or donor agencies. This creates a comprador group whose lifestyle depends on doing the bidding of foreigners.

White South Africans still harbor memories of the colonial era when Maputo was called Lourenco Marques (universally known as "LM") and was known for prawns, beaches and inter-racial sex. The South Africans are back as tourists, reclaiming and building beach houses and destroying the dunes with beach buggies that are banned on South African shores.

But the big winners are the multinational corporations that are reaping the privatization harvest. South African Breweries, which already dominates the region, has taken over two of Mozambique's three breweries. Cimpor of Portugal has taken over the cement factories. The big tea and sugar plantations are due to be privatized this year, probably to multinational agribusinesses.

So far, despite claims by the IMF and World Bank about how foreign investment will revitalize the economy, there have been few investments in new productive enterprises. The biggest player has been the British Lonhro.

"A dialogue of the deaf"

By now, even some of the IMF's natural allies have turned against it, arguing that Mozambique's stabilization policies do not make sense, even in narrow neo-liberal terms.

"The IMF is strangling Mozambique" says Lisa Audet, local head of Equator, part of the Hongkong and Shanghai Banking Corporation, sixth largest banking group in the world. Jeffrey Sachs, the far-right director of the Harvard Institute for International Development and author of the failed liberalization policies in Eastern Europe, visited Mozambique and used words like "unrealistic," "unnecessary" and "excessive" to describe IMF demands.

The European Commission economist in Maputo, Sven von Burgsdorff, warns that the IMF may be killing rather than curing the patient. "Stabilization will have to be accommodated in the context of a growth strategy -- and not vice versa," he argues.

The issue came to a head on September 23, 1995, when the head of a visiting IMF delegation, Sergio Leite, used a televised press conference to condemn a just-agreed-to minimum-wage hike from $15 to $20 a month. In a closed meeting with donors three days later, Leite warned that, although Mozambique was doing more than required by the IMF, continued high inflation meant that Mozambique might be declared "off track." Donors panicked, because of conditionality, which means most donors including the United States only give aid to countries with IMF programs in place; if the IMF declared Mozambique off-track they would be forced to cut their bilateral aid. Donors were already unhappy with the IMF because it was restricting aid the donors thought was essential for post-war reconstruction.

Hurried meetings followed. On October 6, major donors, including the U.S., Dutch and Swiss ambassadors and representatives of the United Nations and European Commission, issued an unprecedented public statement that backed the new government's economic team, warned against the "disruption in financial support" that would result if Mozambique were declared off track and in a veiled way opposed IMF caps on their aid for reconstruction.

The donor group said the IMF's battle against inflation needed to be balanced with the need to revive production, create jobs and rebuild the economy. Its criticism of the IMF was convoluted but clear: "While we endorse the demand management approach of the IMF and the government to combat inflation, we are deeply concerned about the lack of a supply response in the Mozambican economy." In other words, too much money chasing too few goods needs to be tackled not just by cutting money supply, but also by increasing the production of goods.

Remarkably, even the local World Bank office took an active (albeit secret) part in promoting the statement. This is because the Bank is torn in three ways in a bitter and acrimonious struggle over Mozambique. The local office opposes the IMF line. "Task managers" in Washington want to lend as much money as possible and promote big roads and schools projects now being cut back by the IMF. But the country operations manager in Washington supports the IMF line, even though it is opposed by the local office and means cuts in Bank lending.

Despite its bland-sounding rhetoric, the statement's unprecedented questioning of IMF judgment by wealthy nations drew fiery denunciations from both Bank and Fund. Finance Minister Tomás Salomâo was summoned to Washington to meet IMF Managing Director Michel Camdessus just a few days later.

While the IMF did not declare Mozambique off track, subsequent IMF teams in Mozambique have been headed by a higher-ranking official. As if to punish the outspoken donors, they imposed a new and even harder line which restricts aid spending.

Internal documents reveal that at a January 16, 1996 meeting, the IMF board said that the donor statement was due to "some misunderstanding" on the part of the diplomats that had been resolved.

But it has not been. The Swiss government aid agency invited Sachs to Mozambique three times in later 1995 and early 1996 specifically to challenge the IMF line. Progressive donors are privately discussing the creation of a set of poverty-reduction "benchmarks" that could replace IMF approval as a condition of aid.

Privately, government ministers are caustic about the IMF, which they feel is destroying their country. One minister told Multinational Monitor the IMF simply refuses to listen; "it is a dialogue of the deaf," he says. A top Mozambican economist says that IMF staff simply lecture Mozambicans "like the missionaries of old preaching to the natives."

Former officials can be more outspoken. Abdul Magid Osman, who as finance minister in the late 1980s had to negotiate with the IMF and the World Bank, says simply, "The IMF is not a development agency; it is an audit agency. You cannot leave development to the auditors. Development is much more complex -- you need a vision."

Present ministers and officials know that the IMF and World Bank can be vindictive, and that they have forced the government to dismiss critics of their policy, so in public they kow tow politely and say that Washington is the font of all wisdom. But the private criticisms are finding a wider outlet.

In March 1996, Finance Minister Salomâo convened a closed day-long workshop with Mozambique's top economists, including two former finance ministers, to seek an alternative growth-oriented strategy.

At a May meeting, the Frelimo Central Committee, the party's highest body, said what ministers could not say. It sharply criticized IMF-imposed economic policy. In a highly unusual, though indirect, attack on the IMF, a Central Committee statement said, "Macro-economic policies lose all legitimacy when they inevitably lead to degrading citizens' living standards, reducing them to absolute misery." The Committee also called for a halt to privatization -- although the government nonetheless appears ready to privatize the two state-owned commercial banks, the water company and the national airline -- and rejected the IMF's single-minded obsession with inflation. "The reduction of inflation and economic growth should be pursued harmoniously in such a way that they do not result in greater suffering for Mozambicans," the statement said.

It remains to be seen whether the Fund will take any notice of the backlash. But in Mozambique, the failure of Fund policy is more obvious each day.

How the IMF controls aid to Mozambique

The IMF is actually forcing donors -- including the World Bank -- to give less aid and lend less to the world's poorest country. It argues that post-war reconstruction is inflationary and must be delayed until the economy is "stabilized." It insist major donor-funded projects to rebuild roads, schools and rural health centers must be spread over longer periods of time, meaning delays in the recovery of the rural economy.

The IMF has imposed a series of 15 different targets on Mozambique. One requires that tax revenue rise from 17.6 percent of GDP in 1994 to 22.6 percent in 1996, an increase of $93 million in just two years.

The benchmark which controls aid is "total deficit before grant" (the government deficit before loans and aid) which must fall from 29.7 per cent of GDP in 1994 to 16.8 per cent in 1996, a decrease of $173 million. Deficit before grant is the difference between tax and customs revenue and total government spending -- current spending including, for example, teachers salaries, capital spending on roads and other infrastructure, and debt repayment. This difference is made up through borrowing and aid, but another IMF benchmark prohibits the government from borrowing and actually requires saving. The "deficit before grant" therefore correlates precisely with foreign aid to the government. Thus to force a cut in "total deficit before grant" is in fact to force a cut in aid.

In particular, this prevents donors from raising the salaries of nurses and teachers, which are below the poverty line. And World Bank war-damage repair projects are to be substantially cut back.

The IMF is doing two other things to reduce Mozambique's use of aid. It is demanding that Mozambique increase its foreign reserves by $100 million. Since the only extra source of dollars is aid, this demand amounts to a requirement that $100 million in 1996 foreign aid be kept in the bank and not spent. Finally, the IMF says that further debt write-offs for Mozambique will be treated as repaid debt. In other words, the write-offs will count as government spending in the deficit-before-grant equation.

-- J.H.

Lonhro and Child Labor

The British-based multinational Lonhro is probably the largest foreign investor in post-independence Mozambique. Lonhro backed both sides from 1982, when it reopened its sanctions-closed oil pipeline from the Mozambican port of Beira to the newly independent Zimbabwe. To keep Renamo from sabotaging the pipeline, then Lonhro head Tiny Rowland promised Renamo $2 million per year, according to author Alex Vines. Rowland publicly backed the Mozambican government and invested in large farms, gold mines and the rehabilitation of the Hotel Cardoso in Maputo. Rowland also played a key role in getting Renamo head Afonso Dhlakama to enter peace talks with the government.

Rowland's role seems to have benefitted all parties -- Renamo, Mozambique's government and Lonhro itself -- which seems to have gained access to land and mineral rights at knock-down prices. The departure of Rowland has not reduced Lonhro's involvement; on February 19, 1996, Lonhro's new head, Dieter Bock, signed a major oil exploration agreement under which the company has agreed to invest as least $8 million in Mozambique.

Lonhro's cotton plantations caused a furor in early 1996, when the local media reported that small children were picking cotton on Lonhro plantations instead of going to school. A health worker was shocked to see children being loaded into Lonhro lorries, some "so small they could not see over the side." The news agency AIA reported on June 18 that the children earn 25 cents a day, half the adult rate. A Lonhro spokesman in London, John Simmons, said Lonhro does not actually employ children, but he admitted that they did go to the fields to "help" their parents.

-- J.H.

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