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IMF joins calls to end Mozambique fuel subsidies

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The International Monetary Fund (IMF) has called on Mozambique to reform its fuel subsidy system – a move that will be vital in the struggle to put Mozambique’s foreign debt back on a sustainable path.

On Tuesday, Mozambique’s Ministry of Mineral Resources and Energy announced an increase in the price of petrol, diesel and gas, which are sold at regulated prices below their cost on global markets. The difference is made up by government subsidies, but delays in paying these have recently caused petrol retailers to warn that they could go bust.

Carlos Muianga, a researcher at Maputo-based think tank the Institute for Economic and Social Studies (IESE), told Zitamar News  increases are likely to increase gradually towards a price of around 80 meticais per litre (US$1.18) from the prices introduced this week of 56.06 meticais for petrol, and 51.89 meticais for diesel.

However, these changes are coming too late. “The normal thing would have been for the state to gradually start adjusting maybe 5 or 6 years ago,” he said.

Mozambique has come close to fuel crises twice in recent months, thought to be due to the inability of state-owned importer IMOPETRO to pay its bills. The government has been asking foreign donors for help with the issue – most recently President Filipe Nyusi himself on a visit to Japan, which elicited a vague offer of assistance.

The association of Mozambican petrol companies, AMEPETROL, said in an open letter to the Prime Minister on 2 March that the government owes them around $70 million, a figure that is rising at a rate of $7-10 million per month, according to the letter.

According to an opinion piece published on Thursday by Ari Aisen, the IMF’s resident representative in Mozambique, the subsidy Mozambique pays to keep fuel prices down totals around 1%-1.5% of GDP, depending on global oil prices. Most of the benefits from the subsidy accrue to a narrow demographic of richer, car-owning Mozambican residents, Aisen wrote.

Mozambique must now move to a system of using international reference prices, and make monthly adjustments to the retail price of fuels, according to Aisen. “It is fundamental to adopt international reference prices to properly align incentives throughout the import system, and reduce inefficiencies,” he wrote.

“It’s also essential to put in place automatic adjustments in the price of fuel, every month.”

Subsidy reform vital to be able to honour external debts

Mozambique’s government is currently trying to restructure its external borrowing, having admitted last October that it doesn’t have the capacity  to repay the debts in 2017 – and only limited capacity before 2022.

In a document to its creditors explaining the country’s predicament, the government said that “failure to remove the [fuel]subsidies would further negatively affect Mozambique’s payment capacity”.

The model showing repayment capacity in the coming years, prepared by Mozambique’s financial advisers Lazard Freres, assumes Mozambique to clear its arrears on the subsidy in 2017, after reforming the system.

The document also says that another risk to Mozambique’s financial situation is the weakness of four state-owned enterprises – including state petroleum company Petromoc, which is the country’s largest supplier of fuels.

© 2017, Zitamar Ltd. Reproduction and dissemination prohibited without written permission.

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