The argument by the Organisation for Economic Cooperation and Development (OECD) that tightening South Africa’s wealth tax regime would rebalance ... generational inequality has a fundamental flaw: it targets a “flighty” base, says an expert from the African Tax Institute.
In 2016, the depth of corruption in Mozambique exposed by the hidden debt scandal sent the country’s economy into a tailspin. Donors suspended aid; the local currency – the metical – collapsed, and Mozambique defaulted on its debt.
The country has come a long way since then. In May this year, the International Monetary Fund (IMF) announced a fresh $456m Extended Credit Facility (ECF), the metical has stabilised, and economic growth is predicted to reach 4.4% in 2022, according to Fitch Solutions.
Behind Mozambique’s transformation is the assurance of liquefied natural gas (LNG) production. The Coral South Floating LNG (FLNG) platform in the Rovuma Basin, just off the coast of Cabo Delgado in the northeast, is on the verge of starting production.
With the majority owned by Italy’s Eni, Coral South is the first deepwater FLNG facility in Africa, and only the third of its kind in the world. Once in full operation, Coral South will produce 3.4m tonnes of LNG per year, and the government expects to collect billions of dollars in tax revenue from the project.
Economic development, as a result of LNG coming online in Mozambique, will depend on the degree of restoration of stability in Cabo Delgado, following through on political reform in Maputo and whether or not global gas prices remain high.
“The start of LNG production is the trigger that has pushed donors to reengage with Mozambique,” says David Cowan, chief economist for Africa at Citibank. “For the international development community, it’s a much better idea for them to engage as early as possible before oil and gas revenue comes onstream so that they can have some influence around its development and how revenue is used.”
The first shipments of LNG are imminent – the IMF and Mozambican authorities reached a staff-level agreement on policies that could support the executive board’s approval of the first review of the programme under the ECF arrangement on 19 September.
The timing was immaculate. But whether this engagement and revenue from LNG, will create meaningful opportunities for people on the ground is still uncertain. World Bank figures show that 46% of the population lives below the national poverty line.
“Economic development, as a result of LNG coming online in Mozambique, will depend on the degree of restoration of stability in Cabo Delgado, following through on political reform in Maputo and whether or not global gas prices remain high,” says Cowan.
In April 2021, following horrific attacks by Islamist insurgents in Palma, Cabo Delgado province, France’s TotalEnergies declared force majeure, evacuating workers from the region and suspending work on its $20bn onshore LNG project, Mozambique LNG. Soon after, reports emerged that ExxonMobil would delay its final investment decision on Rovuma LNG, another onshore project.
The two uncertain projects have a planned combined production capacity of approximately 20m tonnes of LNG per year, so the suspension of work dealt a blow to both the French oil major and the Maputo government.
In an effort to rebuild stability in the region, the Rwanda Defence Force (RDF) sent 1,000 troops to northern Mozambique on 9 July 2021. Less than a week later, the Mozambican government approved the deployment of 2,000 troops from eight Southern African Development Community countries to Cabo Delgado as the SADC Mission in Mozambique (SAMIM).
“Working together, SAMIM and the RDF were able to drive insurgents from the area,” says Wade Green, the regional manager for sub-Saharan Africa at Aldebaran Threat Consultants. “From last October to around April this year, things were looking pretty good in the northeastern province.”
But a date of mid-2022 announced by TotalEnergies for the resumption of work on Mozambique LNG has been missed. “I think this is likely to be delayed again to the first quarter of 2023,” says Green.
Geopolitically, Mozambique has never been more important on a global level.
After April, when insurgents were largely contained in Macomia and Nangade Districts, away from the main onshore LNG site in Palma, they had begun to seep back towards the site.
“SAMIM had responsibility for a much larger area than the Rwandans, and this became a problem,” says Green. To provide SAMIM support, the RDF moved in. “But then we had this kind of mission creep situation where both sides were spread thinly, which meant that the insurgents continued to operate in this area,” says Green. “This is partly why the goalposts for Total are continually changing.”
TotalEnergies says it also expects other conditions to be met before work at Mozambique LNG resumes.
“While the company hasn’t come out directly to say it, a lot can be deduced from what leadership and partners on the ground have said,” says Green. This includes the removal of internally displaced people from the area, security and stability in Palma and Mocimboa da Praia (80km south of Palma), assurance that workers would not need to remain in armed camps, and the reopening of land routes between Pemba and Palma.
‘Deluge of cash’
As one consultant on the ground suggests: “TotalEnergies may be willing to compromise on some of this – but they will probably make up for it in the proportion of revenue they collect and repatriate from the project – much to the dismay of local politicians hoping to benefit from a deluge of cash when LNG finally comes online.” Meanwhile, forces have recently contained conflict away from LNG development sites around Palma, says Green.
With a wave of new economic measures – including corporate tax cuts, streamlining repatriation of profits, rationalisation of visa applications, a reduction in value-added tax and tax incentives for new investments over the next three years – Mozambique is courting new investors to turn its strained economy around.
This also includes a government reshuffle. In March, President Filipe Nyusi appointed Adriano Afonso Maleiane as the new prime minister, Ernesto Max Tonela as the economy and finance minister, and Carlos Zacarias as the mineral resources and energy minister.
“I’m not sure investors are fully convinced. Some may be,” says Francisco Avillez, managing partner at ABCC, a law firm based in Maputo. “Some investors will want a proven track record before they swoop back in.”
Instability may delay TotalEnergies’ return, but the company is unlikely to abandon the project altogether. Mozambique, with an increasing global appetite for fuel, will remain in the spotlight.
“Geopolitically, Mozambique has never been more important on a global level,” says Alex Vines, director of the Africa programme at Chatham House. “The US embassy in Maputo has over 500 staff there – that’s got to tell you something.”
As the Russia-Ukraine war rages on and global oil prices remain high, Europe is increasingly setting its sights on African LNG as an alternative source to Russian fuel. Natural gas exploration and production in Africa are likely to continue in the medium to long term.
The government is saying that it will spend the new revenue wisely. President Nyusi has made several promises to support local communities, including support for small to medium-sized enterprises, investment in agriculture, a housing development fund and the promise to allocate 10% of natural-resource revenue back into the provinces where the exploitation occurs.
Mozambique’s proposed Sovereign Wealth Fund (SWF) promises to transparently manage LNG revenue, provide stability against future economic shocks, and support broad-based economic development. The SWF is strongly supported by the IMF.
While the country may be expecting a windfall once LNG comes online, unsurprisingly, the reality is a lot more nuanced. Not only could large international oil and gas companies negotiate better terms for repatriation of profits as the conflict rages on, but Mozambique’s state-owned oil and gas company, Empresa Nacional de Hidrocarbonetos (ENH), has financed its stakes in the country’s LNG via government-backed loans.
As more projects come online, and as interest accumulates on the debt, ENH’s liabilities will increase, potentially eroding government revenue from LNG and leaving the SWF without much funding.
Many calculations are indeed changing – multi-laterals are back, global oil and gas prices are high, and LNG appetite has increased – but LNG is unlikely to be a panacea.
Rodrigues at Nedbank says: “LNG may be the most talked about opportunity, but there is also huge potential in terms of hydro, solar and wind power, and agriculture, infrastructure, and tourism also has huge potential.”
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