Cablegate: May/June Economic Digest: Mozambique

DE RUEHTO #0801/01 1921104
R 111104Z JUL 07





E.O. 12958: N/A
SUBJECT: May/June Economic Digest: Mozambique

MAPUTO 00000801 001.2 OF 004

1. This is a brief summary of significant economic
developments in Mozambique during May and June 2007.
We provide it as a supplement to our other reporting.
The items discussed are:

-- Investment in Tourism Increases Significantly

-- M-Cel Now in the Black

-- Theft Plagues MozambiqueQs Power Utility

-- EDM Plans Major Grid Investments

-- New Tender for Oil Exploration on the Horizon

-- Mining Investment in Mozambique Increased by 56%

-- Port of Nacala to Link Zambia with Indian Ocean

-- CVRD Signs Contract with GRM; Moatize Mining Begins
By 2010

-- Mozambique Buys Back Commercial Debt

-- Minimum Wage Increased 14%

-- IMF Concludes Final PRGF Review

-- Sweden to Help Bring Electricity to Niassa

-- Inflation Low, Central Bank Reduces Key Interest
Rate, Private Sector Wants More

Investment in Tourism Increases Significantly
--------------------------------------------- -

2. A government report noted that MozambiqueQs
tourism sector saw an increase of USD 83 million in
investment between 2005 and 2006, reaching a total of
USD 604 million. According to Deputy Tourism Minister
Rosario Mualeia, the majority of the investment was in
hotels, roads and new tourist resorts. Deputy
Minister Mualeia also predicted that 2007 will be one
of the best years in decades for the tourism sector,
estimating that Mozambique would receive over one
million international tourists and revenues of over
USD 150 million. Tourism revenues for 2006 totaled
USD 144 million.

M-Cel Now In the Black

3. M-Cel, MozambiqueQs mostly publicly owned cell
phone company, is now running a profit, according to
its latest press release. M-Cel states that it made a
profit of approximately USD 19.6 million in 2006, with
total revenue of approximately USD 170 million, an
increase of 29 percent compared with 2005. M-Cel
claims that it holds 70 percent of the Mozambican cell
phone market. Competitor and private company Vodacom
claims 35 percent and continues to post losses.

Theft Plagues MozambiqueQ Power Utility

4. MozambiqueQs state power utility Electricidade de
Mozambique (EDM) has lost more than USD 6.5 million to
theft since 2001. In the first half of 2007 EDM
suffered losses of more than USD 650,000. Oil from
power transformers and items made of copper or
aluminum are favorite targets. According to EDM, the
theft results in often long power cuts to areas as the
company waits for replacement transformers and other

EDM Plans Major Grid Investments

MAPUTO 00000801 002.2 OF 004

5. On June 22, Finance Minister Manuel Chang signed
EDM's new program contract. Under the terms of the
new program contract, EDM plans to set up 210,000 new
links to the grid by 2009. These upgrades will cost
an estimated USD 382 million and will bring
electricity to nearly one million people, largely in
rural areas. Nearly 70 percent of the funding will
come from unspecified overseas sources; EDM will raise
the remaining 30 percent. According to Chang, the GRM
plans to provide grants and credits to EDM and assist
the company in accessing overseas capital markets; the
government is also considering canceling part of EDMQs
outstanding debts.

New Tender for Oil Exploration on the Horizon
--------------------------------------------- -

6. Mineral Resources Minister Esperanca Bias
announced in June that Mozambique intends to launch a
new oil exploration tender by the end of the year.
The new tender will focus on the southern province of
Inhambane. South of Inhambane, the Pande and Temane
gas field are proven, with Pande alone holding
reserves of over 3.5 million cubic feet. Minister
Bias stated that considerable oil and gas exploration
possibilities existed in the provinces of Gaza,
Inhambane, Sofala, Zambezi, Nampula, Cabo Delgado and
related offshore areas.

Mining Investment in Mozambique Increased by 56%
--------------------------------------------- ----

7. Suggesting that investors and explorers see real
potential in MozambiqueQs mineral rich, but largely
unexplored, provinces, mining investment in Mozambique
between 2005 and 2006 increased by 56%. The increase
in investment in the mining sector has been rapid;
investment in 2004 reached USD 40 million, climbed to
USD 160 million in 2005 and reached a staggering USD
250 million in 2006. The GRM issued over 900 mining
licenses last year, the majority for
exploration/mining in base metals, tantalite, coal and
gold, however significant exploration for uranium and
other elements continues.

Port of Nacala to Link Zambia with Indian Ocean
--------------------------------------------- ---

8. According to Zambian Ambassador to Mozambique,
Edwin H. Hatembo, by September 2007, Zambia will be
linked by rail to the Port of Nacala. Hatembo, who
was visiting Nampula as part of a group of African
ambassadors studying the feasibility of using the
Nacala corridor, stated that come September the Nacala
corridor will be one of ZambiaQs doorways for foreign
trade. Reconstruction work is currently underway on
the railway line between Nchingi and Chipaka, in
Malawi; completion of this line is necessary to link
Zambia to the Nacala corridor. (Note: The Nacala
Corridor railway and port is run by CDN, an OPIC-
backed investment 51% owned by a consortium of two
American companies and one Mozambican investor. End

CVRD Signs Contract with GRM; Moatize Mining Begins by
--------------------------------------------- ---------

9. Companhia Vale do Rio Doce (CVRD) announced that
the GRM formally approved the mining contract for the
development of the multi-billion-dollar Moatize coal
project, located in the northwestern province of Tete.
Signing of the Moatize contract followed approval of
the project development plan by the GRM in early June.
The contract grant is for 25 years, extendable by
CVRD, and clarifies the tax, international trade,
labor and foreign exchange rules that will govern CVRD
investment in Moatize. Training of technical staff,
installation of equipment and construction of
infrastructure should be completed within 36 months,
with mining of coal beginning in 2010. Moatize basin
holds reserves of at least 2.4 billion tons of coal.

MAPUTO 00000801 003.2 OF 004

CVRD expects an annual production of approximately 11
million metric tons of coal products, with open pit
mining continuing for 35 years.

Mozambique Buys Back Commercial Debt

10. Mozambique and the World Bank signed an agreement
on May 10 under which Mozambique bought back its
commercial debt for nine percent of its nominal value.
The agreement grants Mozambique USD 16.1 million to
buy back commercial debt with a nominal value of USD
176 million. The 176 million includes USD 119.8
million in capital and USD 56.2 million in interest.
Norway granted USD 14.7 million dollars, with the
World Bank contributing USD 1.4 million. This
agreement is the second buy back agreement for
Mozambique and makes the Mozambican government
completely free of commercial debt. (Note. The first
buy back agreement was in 1991 for USD 123.8 million
dollars (nominal value). End Note.)

Minimum Wage Increased 14%

11. In May the GRM raised by 14 percent the statutory
minimum wage for industry and services. The increase
followed an extended deadlock in negotiations at the
Consultative Labor Commission (CCT), the tripartite
negotiating body which includes government, union and
Mozambican Confederation of Business Associations
(CTA) (the umbrella organization representing the
private sector) representatives. Agricultural workers
received a lower increase of 10 percent. The current
increases will be backdated to April 1st. The 14
percent increase is above the 2006 consumer price
inflation rate of approximately 9 percent.

IMF Concludes Final PRGF Review

12. On June 18, the Executive Board of the
International Monetary Fund (IMF) completed its final
review of MozambiqueQs economic performance under the
IMFQs Poverty Reduction and Growth Facility (PGRF).
The PGRF Loan agreement, for approximately USD 17.1
million, allowed for disbursements in six
installments, conditional on positive reviews. The
latest and final review allows for a final
disbursement of the remaining USD 2.4 million still
outstanding. The IMF is not offering any additional
loans to Mozambique, instead offering to assist
through a three-year Policy Support Instrument (PSI).
PSIs are endorsements by the IMF of a countryQs
economic policies; according to the IMF, MozambiqueQs
PSI will support economic reform by helping to
maintain macroeconomic stability.

Sweden to Help Bring Electricity to Niassa

13. Sweden will contribute approximately USD 11.3
million to construct a new electricity transmission
line in the northernmost province of Niassa. The new
line will link the city of Cuamba to Mecanhelas and
Marrupa district capitals in the eastern region of the
province. This addition is part of the governmentQs
goal to link over 100 of the 128 district capitals
with the national power grid by 2010. This grant is
in addition to SwedenQs commitment, worth
approximately USD 100 million, to expand the Cahora
Bassa power lines from Zambezia province up to Cuamba
and on to Lichinga, provincial capital of Niassa.

Inflation Low, Central Bank Reduces Key Interest Rate,
Private Sector Wants More
--------------------------------------------- ---------

14. According to the Bank of Mozambique, the rate of
inflation (based on the Maputo Consumer Price Index)
was 1.55 percent during the first quarter of the year.

MAPUTO 00000801 004.2 OF 004

The GRMQs stated goal is to keep inflation at or below
six percent in 2007, compared with over 9 percent in
2006. Despite low inflation, commercial banks
continue to charge elevated rates of interest. The
average interest on a 365 day bank loan in April 2007
was 23.84 percent, higher than the same time in 2006.
In an attempt to get commercial banks to lower their
interest rates, the Bank of Mozambique announced on
June 11 that it would cut its own key interest rate
from 17.5 to 15.5 percent. The chairperson of the
CTA, Salimo Abdula, characterized the action as
positive, but CTA wants additional moves to make
credit cheaper and business more competitive. Lack of
access to capital is an oft-cited complaint amongst
businesspeople as limiting ability to invest and be


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