Mozambique - July Economic Digest

UNCLAS SECTION 01 OF 03 MAPUTO 001002 SIPDIS SIPDIS AF/S FOR HTREGER AND JMALONEY JOHANNESBURG FSC FOR RDONOVAN JOHANNESBURG TDA FOR DSHUSTER USDOC FOR RTELCHIN MCC FOR SGAULL USAID FOR AA/AFR AND AFR/SA E.O. 12958: N/A TAGS: ECON EAID EINV ETRD MZ SUBJECT: Mozambique - July Economic Digest MAPUTO 00001002 001.2 OF 003 ¶1. This is a brief summary of significant economic developments in Mozambique during July 2006. We provide it as a supplement to our other reporting. The items discussed are: -- Labor Law Draft in Limbo -- 25% "Incentive" Given to Entrepreneurs After the Fact -- EU Continues to Hold Up Agreement on Mozambique's Planned Purchase of Cahora Bassa Dam -- President Guebuza Names New Central Bank Governor -- Fiber Optic Link with South Africa Inaugurated -- Government Plans Increased Butane Storage -- Fuel Price Increases Avoided Due to a Strong Metical -- Mozambique Signs Third Framework Agreement with UN -- Japan to Support the Nacala Development Corridor -- Sweden to Assist with Alternative Fuel Development Labor Law Draft in Limbo -------------- ¶2. The Mozambican Council of Ministers forwarded a version of the revised labor law to the National Assembly for review and approval at its next session (October - December). This version differs substantially from the version drafted and approved at the technical level by the tripartite commission charged with revision the current labor law. (Note: This tripartite commission included members of the government of Mozambique, union leaders and representatives from the private sector. End note.) Despite initially signing off on the commission's draft, Minister of Labor Taipo later submitted a different and more employee-friendly version to the Council of Ministers. It is still unclear what the final version will look like; the Assembly is unlikely to debate this politically charged issue until after Frelimo's National Congress in mid-November. 25% "Incentive" Given to Entrepreneurs After the Fact -------------- -------------- ¶3. Local media reported that the government of Mozambique recently gifted up to 25% of the cost of companies purchased by Mozambican individuals during the privatization of national companies (which occurred mainly in the late 1980's and 1990's). The gift is being described as an incentive, even though the deals were signed years ago. The decree states that all companies and employers who have already paid 75% or more of their debt are forgiven the remaining amount. Both the private sector and the unions have applauded the move. Representatives of CTA, the private sector umbrella organization, many of whose members are affected by this decision, declared that this would increase Mozambican competitiveness since it reduces the difficulties many companies have in paying their contractual obligations. EU Continues to Hold Up Agreement on Mozambique's Planned Purchase of Cahora Bassa Dam -------------- -------------- ¶4. The transfer of the Cahora Bassa hydroelectric dam to Mozambican control continues on hold due to European Union concerns. Mozambique signed a MOU with the Portuguese government in November 2005, under which Portugal was to transfer a majority of its shares in HCB (the dam holding and operating company) to Mozambique for 950 million USD. The deal is subject to EU review, however, to ensure that it will not push Portugal's budget deficit beyond previously agreed limits. According to the Mozambican government, this review has been the main reason for the delay in the signing of final documents and transfer of ownership for past eight MAPUTO 00001002 002.2 OF 003 months. In his recent trip to Guinea Bissau, President Guebuza demanded a rapid conclusion to the Cahora Bassa transfer, stating that he negotiated with Portugal and not the European Union. ¶5. Comment: It is unlikely that President Guebuza's demand to accelerate the process will be met, as the transfer is technically complex and its impact on Portugal's overall budget deficit unclear. Jose Manuel Durao Barroso, the former Portuguese prime minister who is Chairman of the European Commission, recently admitted that the issue likely will take some time to solve. According to Durao Barroso, the EU is still trying to determine whether the deal will push Portugal's budget deficit above the 3% threshold required under the EU's stability pact. ¶6. Comment Continued: The issue is potentially further complicated by clauses in the transfer agreement requiring Mozambique to use Portuguese contractors for a future north bank powerhouse, estimated to be worth around USD 1 billion, as well as all future maintenance work on the dam. It addition, the agreement also promises preferential treatment to Portuguese companies for other projects in the energy sector. Internally, there are also concerns that this amounts to an effective re-nationalization of Cahora Bassa, something that not only runs counter to the government's stated policy of privatization but raises concerns about the government's technical capacity to keep the dam operating properly. End Comment. President Guebuza Names New Central Bank Governor -------------- -------------- ¶7. On July 24 President Guebuza appointed Ernesto Gove as the new governor of the Bank of Mozambique. This is a five- year appointment. Gove replaces Adriano Maleiane, who held the post for 15 years. Previously, Gove served as Maleiane's deputy. At Gove's swearing-in ceremony, President Guebuza challenged him to persuade commercial banks to open more branches in rural districts and to improve banking services. Fiber Optic Link with South Africa Inaugurated -------------- - ¶8. On July 14 Antonio Mungwambe, Minister of Transport and Communications, inaugurated the first fiber-optic link between Mozambique and South Africa. This link represents a new phase in Mozambique's national telecommunications program, which, according to Mungwambe, calls for expanding the capacity and improving the quality of fixed and mobile phone communications around the country, as well as internet, radio and television capabilities. Government Plans Increased Butane Storage -------------- ¶9. In response to recent supply difficulties, the Mozambican government proposes to expand storage capacity for fuels, with an emphasis on butane gas. To achieve this goal, Petromoc, the state oil and fuel distribution company, is currently assessing the possibility of rehabilitating storage tanks located in the Maputo suburb of Matola. Currently Mozambique has storage capacity for approximately 700 tons of butane, only enough to last 15 to 20 days. Under the government plan storage capacity would increase to an amount sufficient for 35 to 45 days. The government also hopes in the near future to produce its own gas from Mozambique's natural gas reserves in Inhambane province, though such a plan is only notional at the moment. Fuel Price Increases Avoided Due to a Strong Metical -------------- -------------- ¶10. Due to the strength of the national currency, the metical, the government's monthly review of fuel prices showed a 3.8 percent increase in the cost of diesel. All other fuel prices either remained stable or dropped. The cost of fuel oil fell by 16.8 percent and the cost of cooking gas by 6.8 percent. Salvador Namburete, the Energy MAPUTO 00001002 003.2 OF 003 Minister, warned the public that future fuel price increases were inevitable, despite this month's reprieve. Mozambique Signs Third Framework Agreement with UN -------------- -------------- ¶11. On July 27 Mozambique and the UN signed a framework agreement covering UN development assistance to Mozambique for 2007-2009. Under this third framework agreement between Mozambique and the UN, the UN will disburse over USD 300 million to support government reform, fund training programs and combat HIV/AIDS. Japan to Support the Nacala Development Corridor -------------- --- ¶12. During a visit of Japanese parliamentarians to Mozambique, Yoshinori Ohno, Chairperson of the Japan- Mozambique Parliamentary Friendship League, announced that Japan will assist in an economic viability study of the Nacala Development Corridor - the railway track from the northern port of Nacala inland to Malawi. This assistance will be part of Japan's overall aid package to Mozambique. Sweden to Assist with Alternative Fuel Development -------------- -------------- ¶13. Swedish technicians are currently working with the Mozambican government to help develop an alternative fuel industry. The focus of the work is the production of ethanol. The government believes there is the potential to supply the entire Mozambican market, as well as export surplus to Europe (including Sweden). Petromoc (Mozambique's oil parastatal) and the Ministry of Energy are also exploring the potential of producing bio-diesel. Several Mozambican vegetable oil producers are currently participating in a bio-diesel pilot program, with some assistance provided by the U.S. NGO TechnoServe. Dudley