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