Mozambican President Filipe Nyusi

Mozambique, the southern African country is facing a serious debt crisis and may be heading toward a default.

With a  debt burden of almost $10billion, representing 80 per cent of its GDP, the country is finding it difficult to come up with cash to repay its creditors. Worse, its foreign reserves keep nose-diving.

The  reserves fell to USD1.75bn in mid-May (from USD1.85bn in early April and USD2bn at end 2015 as exports continue to struggle. The country’s financial crisis has been  further compounded as  donors and multilateral organisations have  halted programmed budget support  after the country admitted hidden debt of $1.35billion.

The donors will not give the cash strapped country more money until the debt debacle is resolved.

This aid amounts to around USD300m (11% of the budget for 2016), in addition to the USD165m in suspended funds from the IMF.

Eitch, the ratings agency on Monday downgraded Mozambique’s credit rating to ‘CC’ from ‘CCC’, indicating that “a default of some kind appears probable”.

The downgrading coincided with the failure of government to honour a sovereign guarantee behind a $535 million loan taken out by a state-run company to build shipyards that have not materialised.

The state firm, Mozambique Asset Management (MAM), was unable to make the $178 million payment and the government  also failed to come up with the cash.

Foreign creditors behind the loan, organised by Russia’s VTB Bank, had rejected the war-scarred Southern African country’s initial proposals to renegotiate payments, but were said to be in talks to try to reach a deal.

The VTB loan had been earmarked for the construction of shipyards in the capital, Maputo, and the northern town of Pemba to service the former Portuguese colony’s nascent but potentially huge offshore gas industry.

Proven reserves of 180 trillion cubic feet – enough to supply France, Britain, Germany and Italy for nearly two decades – are among the world’s biggest recent finds, but extracting the gas is taking far longer than expected.

Now energy experts do not expect production for another decade, undermining the immediate need for new shipyards.

The MAM loan is just the tip of a debt iceberg – now exposed as unsustainable – built up in the wake off the gas discoveries.

Another state firm, Proindicus, owned by the Ministries of Interior and Defence and the security services, took out loans of $504 million from Credit Suisse Group and $118 million from VTB, according to an International Monetary Fund (IMF) source.

A February 2013 Credit Suisse document obtained by Reuters said the money was to be spent on high-speed naval interceptors, radar stations, offshore patrol vessels and aircraft.

Those were in addition to a $850 million bond, also arranged by Credit Suisse and VTB in 2013, to build a tuna fishing fleet.

The offshore patrol vessels are now sitting idle on stands on the quayside in Maputo, near the tuna boats, which are rusting at their moorings. The so-called tuna bond was restructured at the end of March.

Furious about being kept in the dark about all the borrowing, foreign donors and the IMF have suspended assistance, making the government’s already dire financial straits even worse.

Compounding Maputo’s woes, the finance minister said on Monday the French-built boats would have to be sent for a refit because they did not meet European Union specifications. He did not reveal costs or say why they fell short of EU standards.

“The costs involved in refitting the boats are high, hence the work is being done in phases,” Maleiane was quoted as saying by the state news agency.

Reuters/NAN