[stop-imf] IMF BLOCKS EXTRA AID TO MOZAMBIQUE

[robert weissman]

IMF BLOCKS EXTRA AID TO MOZAMBIQUE

[Excerpted from Joe Hanlon's Mozambique newsletter]
[Background information on this story follows below the first clip, with
a 1996 story from Joe published in Multinational Monitor]

News reports & clippings no. 93
      from Joseph Hanlon
      (j.hanlon@open.ac.uk)
     26 January 2006
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DONOR CONCERN OVER
IMF CAP ON AID INCREASES

In a repeat of a crisis a decade ago, donors now fear that the IMF is
blocking aid increases to Mozambique. With public pressure in several
European countries for increased aid, and with problems in Ethiopia and
Uganda tainting these former donor darlings, donors are anxious to pump
more money into Mozambique -- especially as budget support. But the IMF
says no -- it will not allow Mozambique to accept more budget support.
Instead, it wants donors to fund more projects outside the state budget --
which goes directly against the policy of many donors.

The issue came to a head with the shocked outcry of donors when the
government on 7 November issued its draft PARPA (Plano de Accao para a
Reducao da Pobreza Absoluta 2006-9; Mozambique's PRSP) which said aid
would increase from $889 million in 2006 to $1,044 million in 2008, but
remains constant after that. Donors were upset and said they had stressed
to the government that more money was available. But the Ministry of
Planning and Development appears to have based its figures on the IMF cap,
rather than money actually available.

The core of the debate, which has been going on for more than two decades,
is that the IMF believes that aid can be inflationary. Since inflation is
the worst possible sin, aid must be limited. But a recent study by the IMF
itself of five countries in Africa, including Mozambique, argued that
substantial aid increases can be controlled and need not be harmful (see
article below).

The issue is expressed in arcane accounting terms. Mozambique's agreement
with the IMF is set out in the 17 October 2005 "letter of intent".
Mozambique is unusual in that the IMF puts a limit on what it calls
"domestic primary deficit", which is the government's current spending and
locally financed capital spending, less government revenue (from taxes,
customs duties, etc). Government is committed to cutting this deficit from
4.5 bn new meticais ($225 million) in 2005 to 3.8 bn new meticais ($190
mn) in 2006. This is, in effect, the amount of budget support the
government is allowed to spend, yet budget support is predicted to
increase from $274 million to $308 million.

This effective IMF cap on budget support contradicts donor policy in two
ways.

One is that the IMF is putting pressure on Mozambique to tax aid spending.
If donors were to pay tax, this would count as government income and it
could be spent. Bizarrely, if donors give the same amount as additional
budget support, it cannot be spent. This is serious, because most donor
countries have laws saying that aid cannot be taxed by the aid recipient,
so there is no chance of donors paying tax.

The other issue is that the cap excludes donor funded projects. Now, many
donors are trying to reduce the number of projects outside the state
budget, and are anxious to switch from funding individual projects to
having the spending in the budget and funded by increased budget support.
Yet the IMF is pushing exactly the opposite way, saying it will accept an
increase in projects funded by donors outside the state budget, but not an
increase is donor-funded spending within the state budget.

The letter of intent is available on
http://www.imf.org/external/np/loi/2005/moz/101705.pdf
and the draft of PARPA II on
http://www.open.ac.uk/technology/mozambique/pics/d53720.pdf

IMF STUDY SAYS BIG AID
INCREASES ARE OK

An IMF study released last August says that, contrary to IMF assumptions,
low income African countries, including Mozambique, are able to manage
significant increases in aid. A big increase in aid to Mozambique did lead
to an increase in inflation, but this was brought back to a reasonable
level, the study found, both by Bank of Mozambique actions and because
fiscal expansion brought rapid GDP growth.

The study goes on to challenge one of the IMF's own most central articles
of faith by saying that it seems that periods of higher inflation actually
achieve real growth, and that this should be tolerated in order to keep
the exchange rate from depreciating.

Aid volatility is the problem, it says, and low income countries can make
good use of "significant increases in aid" if they are planned.

But it appears that the IMF team which negotiated the letter of intent
with Mozambique last year had not read the institution's own study.

The study is "The Macroeconomics of Managing Increased Aid Inflows:
Experiences of Low-Income Countries and Policy Implications, August 8,
2005" and is on
http://www.imf.org/external/np/pp/eng/2005/080805a.pdf

CARDOSO KILLER
CONVICTED AGAIN --
JAILED FOR 30 YEARS

Anibal dos Santos Junior ("Anibalzinho") on 20 January was convicted of
leading the death squad that murdered investigative journalist Carlos
Cardoso in 2000, and was sentenced to 30 years in prison. He was also
convicted of attempted murder of Cardoso's driver, Carlos Manjate (who has
been declared unfit to work because of the bullet wound to his head),
illegal use of firearms, membership of a criminal association, use of a
false passport, use of false names, false declarations to the legal
authorities, and two counts of car theft.

This was Anibalzinho's second trial. He "escaped" from the Maputo top
security prison in September 2002 and was tried in absentia and convicted
in January 2003. He appealed and in December 2004, after he has "escaped"
a second time, the Supreme Court ruled that he had a right to be present.
He returned to Mozambique and the trial was reopened. He made little
attempt to defend himself and was again convicted. This time he did not
appeal.

Lucinda Cruz, lawyer for the Cardoso family, warned during the trial that
Anibalzinho had been helped to escape twice from the "maximum security"
prison and that he clearly had high level protection. After the trial, she
predicted Anibalzinho would escape again "within two years". His lack of
defence and his decision not to appeal suggests that he thinks he has
other ways of avoiding serving the sentence.

Meanwhile, the New York Times in an article on 21 January, said "a host of
unanswered questions about Mr. Cardoso's death and the banking scandal
that led to it continue to overshadow the victories in the Cardoso case."

It continues "Prosecutors have made no known headway into accusations that
a son of former President Joaquim Chissano, who led Mozambique as the
scandal unfolded, had close ties to those who arranged Mr. Cardoso's
death. Nor has the government explained how the newly convicted Mr. dos
Santos - known universally as Anibalzihno, or 'Little Hannibal' - twice
managed to walk out of Maputo's maximum-security prison and flee the
country with false passports, after first being arrested in the Cardoso
inquiry almost five years ago."
The article is on
http://www.nytimes.com/2006/01/21/international/africa/21mozambique.html

MORE ON DONOR STUDY OF LOANS

The last newsletter contained a short article on a study by Deloitte of
the misuse of loans given by the government with donor funds to companies
controlled by Antonio Simoes -- an issue first raised by Carlos Cardoso.
Attached is a longer AIM article on the subject.

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TO SUBSCRIBE OR UNSUBSCRIBE

This mailing is distributed on the list dev-mozambique-list@open.ac.uk.
This list is used to distribute both the "Mozambique Political Process
Bulletin" as well as clippings and commentary about Mozambique.
There is a different list
dev-mozambiquebulletin-list@open.ac.uk
for those who want to receive the "Mozambique Political Process Bulletin"
but not the clippings and commentary.

1) Using your web browser, go to
    http://mail-lists.open.ac.uk            (note no "www")
2) enter your email address
3) you then see a list of Open University mailing lists with three
dev-Mozambique lists.

If you want to subscribe or unsubscribe, then next to
           dev-mozambique-list
click on SUBSCRIBE or UNSUBSCRIBE. That's all.

If you still want to receive the "Mozambique Political Process Bulletin"
but not the clippings and commentary, then go to
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http://www.multinationalmonitor.org/hyper/mm0796.06.html
Multinational Monitor
July/August 1996

Strangling Mozambique
International Monetary Fund
"Stabilization" in the
World's Poorest Country
by Joseph Hanlon


MAPUTO, MOZAMBIQUE -- Alarmed that the International Monetary Fund (IMF)
is shattering the fragile economy of the world's poorest country,
foreign governments, conservative bankers, Catholic church leaders,
local economists and even some World Bank officials are all pressing for
an alternative to harsh IMF "stabilization" in Mozambique. So far, the
IMF not only refuses to blink, but appears to be turning the screws
tighter to punish the impoverished country for having the temerity to
openly question Fund policy.

Until 1992, Mozambique was a Cold War battlefield. A particularly
brutal, decade-long war killed one million of Mozambique's 15 million
people and inflicted $20 billion in damages; it left Mozambique with a
pitiful per capita GDP of less than $100. Renamo rebels, with the open
backing of apartheid South Africa and right-wing U.S. businesspersons,
and with covert U.S. government approval, destroyed 60 percent of the
nation's primary schools, half of all health posts and half of all rural
shops. One of every three families was forced to flee their homes at
least once during the decade-long war.

With the end of the Cold War, a settlement was arranged in 1992. Unlike
in Angola, peace held in Mozambique, where citizens were exhausted by a
war that few regarded as their own. Multi-party elections took place in
1994. The previously ruling Frelimo party was re-elected, while Renamo
became the main parliamentary opposition.

People flooded home as soon as the shooting stopped. In two years, 1.7
million refugees returned from neighboring countries and a comparable
number of internal refugees went home to their farms.

But peace did not bring prosperity or end hunger. The government Poverty
Alleviation Unit estimates that poverty has increased since the end of
the war; and the high war-time levels of chronic malnutrition have not
fallen with peace.

The cause of the ongoing suffering is IMF-imposed stabilization
policies. As conditions for ending the civil war, the United States
forced Mozambique to join the IMF and World Bank 1984 and then to impose
a modified form of World Bank-mandated "structural adjustment" in 1987.
That was not enough, however, and in 1990 Mozambique had to accept the
much harsher IMF-controlled "stabilization." By then, Mozambique had
also become the most aid-dependent country in the world; with the end of
the Cold War and the end of East bloc assistance, virtually all foreign
aid is "conditional" on obedience to IMF and World Bank demands. So
Mozambique must continue to toe the line.

The IMF has argued that inflation must be controlled at all costs, and
that post-war reconstruction should be deferred because it is
inflationary. As inflation has risen each year after the war, the IMF
has imposed tighter conditions. Most outside of the IMF viewed the
policy as mad, because the war had left virtually no economy to
stabilize. Most donors and Mozambicans have stressed the need to rebuild
the devastated economy and increase production. But so far, the IMF has
prevailed in choking off growth, and rebuilding has been deferred
indefinitely.

"Mozambique is threatened politically, economically and culturally. The
main threat is the World Bank and IMF, who represent the rich countries
-- the G7," says Dom Manuel Vieira Pinto, Catholic Bishop of the
northern city of Nampula. "The international community is creating a new
type of colonialism; we have gone from one colonialism to a much
stronger one -- economic colonialism. At least the old colonialism had a
face; this one does not."


Roller coaster economy

Mozambique's economy has been on a roller coaster for three decades. In
the early 1970s, the country enjoyed subsidies from South Africa as part
of the "white front" against newly liberated African nations. However,
following a 1974 coup in Portugal that ended fascism in that country,
the Portuguese abandoned Mozambique, sabotaging machinery and killing
livestock as they departed.

The victorious Frelimo liberation movement took over the government at
independence in 1975 and halted the economic collapse by 1977. Frelimo
declared itself Marxist-Leninist and returned the now planned economy to
pre-independence levels by 1981.

But the 1980 U.S. election of Ronald Reagan intensified the Cold War,
and South Africa began to launch attacks on Mozambique in 1981. By 1984,
the war had devastated the country.

In 1987, in an effort to curry favor with the United States, Mozambique
introduced its own modified structural adjustment program, including
major currency devaluations, a liberalized market and curbs on
government spending and money supply. Nonetheless, investment was still
directed to the productive sector, foreign trade was regulated and few
government enterprises were privatized.

Frelimo's "turn to the west" was not enough to satisfy the United
States, however, and the war intensified. But it did trigger a big
increase in aid -- which poured in from social-democratic European
nations, as well as, ironically, from the United States -- to bandage
Mozambique's gaping wounds. But no Western country was prepared to stand
up to the United States and demand an end to the killing. By 1990,
Mozambique was the biggest aid recipient in sub-Saharan Africa,
receiving more than $1 billion a year.

The IMF and World Bank were unhappy with Mozambique's home-grown
adjustment policies, and it became clear to Frelimo that winning over
U.S. policymakers who had the power to end the war required total
obeisance. In 1990, Mozambique accepted a full-blown stabilization and
adjustment package. By 1995, the IMF called Mozambique a "strong
adjuster," a designation applied to only 14 countries in sub-Saharan Africa=
.


Perverse results

Stabilization brought dramatic and perverse results. During Mozambique's
own adjustment program in the 1980s, significant growth occurred despite
the war. Per capita GDP rose from $87 in 1986 to $108 in 1990;
industrial production and exports more than doubled during this period.
Inflation fell from 176 percent in 1987 to 33 percent in 1990.

By contrast, once IMF stabilization was imposed, GDP per capita,
industrial production and exports all fell dramatically. The IMF's
stated objective was to curb inflation, even though it had been falling
steadily. Once the IMF took charge, however, it rose from 33 percent in
1990 to 70 percent in 1994.

The two most important controls imposed by the IMF were cuts in
government spending and cuts in credit to the economy. Government
salaries fell dramatically. A doctor earned $350 a month in 1991, $175
in 1993 and now takes in less than $100 a month. For a nurse or teacher,
monthly salaries fell from $110 to $60 to $40 -- not enough to support a
family. Corruption rose rapidly as people sought extra money to survive;
teachers demanded that pupils pay for extra lessons, while women
arriving at maternity hospitals to give birth needed to bring a dollar
or two to pay the midwife.

Total credit to the economy was savagely cut, and by 1995 was one third
the 1990 level. The credit crunch crippled productive sectors of the
economy, particularly agriculture and industry, which faced interest
rates of 44 percent.


The donor package

The IMF has not imposed its stabilization policies in isolation. The
World Bank is simultaneously imposing adjustment, which involves
privatization and ending all subsidies and trade restrictions. Part of
the joint package is rapid devaluation and high interest rates.

These features are all common to the cookie-cutter stabilization and
adjustment programs that the IMF and World Bank impose worldwide. What
is different about Mozambique is that it is just coming out of a war
and, as well as being the poorest country in the world, it is also one
of the most aid dependent.

This dependency creates a strange mix in which donors call the tunes.
Virtually everything is done through aid projects. To turn on the
lights, the Ministry of Agriculture needs aid money. Donors buy up the
best people -- most engineers will not work for the government for $100
a month when they can earn 20 times that much working for a donor.
Mozambique now has about 3,000 foreign aid workers employed by the
United Nations, World Bank, bilateral donors and non-government
organizations. Often they simply fill gaps caused by other donors having
hired Mozambican technicians at high salaries.

The enormous aid industry fuels a dollar economy unaffected by rapid
devaluations. This new Mozambican and foreign elite -- beneficiaries of
the enclave dollar economy -- expect European lifestyles, and shops and
restaurants in Maputo now cater to this.

The growth of the dollar economy is linked to trade liberalization and
the credit squeeze. It has become easier and more profitable to import
goods than to make them. With the credit squeeze, banks cannot supply
the demand for loans. Bankers prefer to loan what money is available on
a short-term basis to Maputo traders rather than to higher-risk farmers.
In June 1996, it was revealed that the biggest bank in the country, the
state owned Commercial Bank of Mozambique (BCM), would not provide any
credit for agricultural marketing this year because it was being
prepared for privatization and would not make any risky loans.

Meanwhile, donors increasingly channel their aid toward imports rather
than support of domestic production. Maputo has 2,116 registered
import-export businesses -- four times the number of businesses that
produce export products.

The import-preference cycle is completed by corruption. The IMF
prohibits the government from paying living wages. Customs officials
take bribes to allow goods to enter duty-free, giving these products a
competitive advantage over locally made goods on which domestic taxes
have been paid. (In this ideological hall of mirrors, the IMF and World
Bank have said that the solution to this problem is to privatize the
customs administration, because a private company, free from IMF
dictates, could pay higher wages and commissions to the same staff.)

The final part of the package is the IMF's restrictions on post-war
reconstruction on the grounds that this would be inflationary, and
inflation must be contained before reconstruction can begin. In rural
areas, four years after the war, many roads remain closed because the
government roads department is starved of funds and few donors are
interested in the glamorless task of building or repairing rural dirt roads=
.

Most of the 3,000 rural shops destroyed by Renamo remain closed, because
shopkeepers lack credit. Last year, in some areas, peasants who had
returned to their old farms could not sell their crops, because no one
would buy -- due to lack of shops and roads, but also because the credit
squeeze meant smaller traders could not obtain working capital. This
year, the best maize crop in more than a decade has been forecast, but
most of it will never be sold.

IMF stabilization has brought prosperity to a few, however. The streets
of the capital, Maputo, are full of new luxury four-wheel-drive
vehicles. There is a building boom of expensive houses. Shops sell
imported electronic goods. Maputo's first pet shop has just opened. Four
new banks have opened, and more are planned.

The Maputo boom highlights the three most dramatic impacts of
stabilization and adjustment -- sharp increases in wealth inequality, an
urban bias and a major shift from production to trade.


Who benefits

Several distinct elite interests have benefited from the stabilization
policies that have further impoverished most Mozambicans. They are:
large Mozambican trading companies, a new Mozambican aid and comprador
group, white South Africans and foreign companies.

Several of the large trading companies are descendants of Portuguese
establishments from the colonial era. The Mozambique Company, for
example, controlled a large part of the colony for three decades; it is
now a major trading company called Entreposto. These large,
self-financed firms do not need credit and are monopolizing commerce in
the rural areas they choose to serve; they are also moving into
plantation agriculture.

Asian traders, originally brought in to run rural shops by the
Portuguese colonizers to prevent black Mozambicans from running
businesses, are also an ascendant power. These merchants moved into the
cities after independence, and with family links throughout the region,
they dominate the import trade. They have become major users of the
available short-term bank credit.

Of the professional classes, only those paid dollar-linked salaries do
well; all the others are being pushed into poverty. Dollar-linked
salaries -- either indexed or paid directly in dollars -- are only
available from foreign companies or donor agencies. This creates a
comprador group whose lifestyle depends on doing the bidding of foreigners.

White South Africans still harbor memories of the colonial era when
Maputo was called Lourenco Marques (universally known as "LM") and was
known for prawns, beaches and inter-racial sex. The South Africans are
back as tourists, reclaiming and building beach houses and destroying
the dunes with beach buggies that are banned on South African shores.

But the big winners are the multinational corporations that are reaping
the privatization harvest. South African Breweries, which already
dominates the region, has taken over two of Mozambique's three
breweries. Cimpor of Portugal has taken over the cement factories. The
big tea and sugar plantations are due to be privatized this year,
probably to multinational agribusinesses.

So far, despite claims by the IMF and World Bank about how foreign
investment will revitalize the economy, there have been few investments
in new productive enterprises. The biggest player has been the British
Lonhro.


"A dialogue of the deaf"

By now, even some of the IMF's natural allies have turned against it,
arguing that Mozambique's stabilization policies do not make sense, even
in narrow neo-liberal terms.

"The IMF is strangling Mozambique" says Lisa Audet, local head of
Equator, part of the Hongkong and Shanghai Banking Corporation, sixth
largest banking group in the world. Jeffrey Sachs, the far-right
director of the Harvard Institute for International Development and
author of the failed liberalization policies in Eastern Europe, visited
Mozambique and used words like "unrealistic," "unnecessary" and
"excessive" to describe IMF demands.

The European Commission economist in Maputo, Sven von Burgsdorff, warns
that the IMF may be killing rather than curing the patient.
"Stabilization will have to be accommodated in the context of a growth
strategy -- and not vice versa," he argues.

The issue came to a head on September 23, 1995, when the head of a
visiting IMF delegation, Sergio Leite, used a televised press conference
to condemn a just-agreed-to minimum-wage hike from $15 to $20 a month.
In a closed meeting with donors three days later, Leite warned that,
although Mozambique was doing more than required by the IMF, continued
high inflation meant that Mozambique might be declared "off track."
Donors panicked, because of conditionality, which means most donors
including the United States only give aid to countries with IMF programs
in place; if the IMF declared Mozambique off-track they would be forced
to cut their bilateral aid. Donors were already unhappy with the IMF
because it was restricting aid the donors thought was essential for
post-war reconstruction.

Hurried meetings followed. On October 6, major donors, including the
U.S., Dutch and Swiss ambassadors and representatives of the United
Nations and European Commission, issued an unprecedented public
statement that backed the new government's economic team, warned against
the "disruption in financial support" that would result if Mozambique
were declared off track and in a veiled way opposed IMF caps on their
aid for reconstruction.

The donor group said the IMF's battle against inflation needed to be
balanced with the need to revive production, create jobs and rebuild the
economy. Its criticism of the IMF was convoluted but clear: "While we
endorse the demand management approach of the IMF and the government to
combat inflation, we are deeply concerned about the lack of a supply
response in the Mozambican economy." In other words, too much money
chasing too few goods needs to be tackled not just by cutting money
supply, but also by increasing the production of goods.

Remarkably, even the local World Bank office took an active (albeit
secret) part in promoting the statement. This is because the Bank is
torn in three ways in a bitter and acrimonious struggle over Mozambique.
The local office opposes the IMF line. "Task managers" in Washington
want to lend as much money as possible and promote big roads and schools
projects now being cut back by the IMF. But the country operations
manager in Washington supports the IMF line, even though it is opposed
by the local office and means cuts in Bank lending.

Despite its bland-sounding rhetoric, the statement's unprecedented
questioning of IMF judgment by wealthy nations drew fiery denunciations
from both Bank and Fund. Finance Minister Tom=E1s Salom=E2o was summoned to
Washington to meet IMF Managing Director Michel Camdessus just a few
days later.

While the IMF did not declare Mozambique off track, subsequent IMF teams
in Mozambique have been headed by a higher-ranking official. As if to
punish the outspoken donors, they imposed a new and even harder line
which restricts aid spending.

Internal documents reveal that at a January 16, 1996 meeting, the IMF
board said that the donor statement was due to "some misunderstanding"
on the part of the diplomats that had been resolved.

But it has not been. The Swiss government aid agency invited Sachs to
Mozambique three times in later 1995 and early 1996 specifically to
challenge the IMF line. Progressive donors are privately discussing the
creation of a set of poverty-reduction "benchmarks" that could replace
IMF approval as a condition of aid.

Privately, government ministers are caustic about the IMF, which they
feel is destroying their country. One minister told Multinational
Monitor the IMF simply refuses to listen; "it is a dialogue of the
deaf," he says. A top Mozambican economist says that IMF staff simply
lecture Mozambicans "like the missionaries of old preaching to the natives.=
"

Former officials can be more outspoken. Abdul Magid Osman, who as
finance minister in the late 1980s had to negotiate with the IMF and the
World Bank, says simply, "The IMF is not a development agency; it is an
audit agency. You cannot leave development to the auditors. Development
is much more complex -- you need a vision."

Present ministers and officials know that the IMF and World Bank can be
vindictive, and that they have forced the government to dismiss critics
of their policy, so in public they kow tow politely and say that
Washington is the font of all wisdom. But the private criticisms are
finding a wider outlet.

In March 1996, Finance Minister Salom=E2o convened a closed day-long
workshop with Mozambique's top economists, including two former finance
ministers, to seek an alternative growth-oriented strategy.

At a May meeting, the Frelimo Central Committee, the party's highest
body, said what ministers could not say. It sharply criticized
IMF-imposed economic policy. In a highly unusual, though indirect,
attack on the IMF, a Central Committee statement said, "Macro-economic
policies lose all legitimacy when they inevitably lead to degrading
citizens' living standards, reducing them to absolute misery." The
Committee also called for a halt to privatization -- although the
government nonetheless appears ready to privatize the two state-owned
commercial banks, the water company and the national airline -- and
rejected the IMF's single-minded obsession with inflation. "The
reduction of inflation and economic growth should be pursued
harmoniously in such a way that they do not result in greater suffering
for Mozambicans," the statement said.

It remains to be seen whether the Fund will take any notice of the
backlash. But in Mozambique, the failure of Fund policy is more obvious
each day.



How the IMF controls aid to Mozambique

The IMF is actually forcing donors -- including the World Bank -- to
give less aid and lend less to the world's poorest country. It argues
that post-war reconstruction is inflationary and must be delayed until
the economy is "stabilized." It insist major donor-funded projects to
rebuild roads, schools and rural health centers must be spread over
longer periods of time, meaning delays in the recovery of the rural economy=
.

The IMF has imposed a series of 15 different targets on Mozambique. One
requires that tax revenue rise from 17.6 percent of GDP in 1994 to 22.6
percent in 1996, an increase of $93 million in just two years.

The benchmark which controls aid is "total deficit before grant" (the
government deficit before loans and aid) which must fall from 29.7 per
cent of GDP in 1994 to 16.8 per cent in 1996, a decrease of $173
million. Deficit before grant is the difference between tax and customs
revenue and total government spending -- current spending including, for
example, teachers salaries, capital spending on roads and other
infrastructure, and debt repayment. This difference is made up through
borrowing and aid, but another IMF benchmark prohibits the government
from borrowing and actually requires saving. The "deficit before grant"
therefore correlates precisely with foreign aid to the government. Thus
to force a cut in "total deficit before grant" is in fact to force a cut
in aid.

In particular, this prevents donors from raising the salaries of nurses
and teachers, which are below the poverty line. And World Bank
war-damage repair projects are to be substantially cut back.

The IMF is doing two other things to reduce Mozambique's use of aid. It
is demanding that Mozambique increase its foreign reserves by $100
million. Since the only extra source of dollars is aid, this demand
amounts to a requirement that $100 million in 1996 foreign aid be kept
in the bank and not spent. Finally, the IMF says that further debt
write-offs for Mozambique will be treated as repaid debt. In other
words, the write-offs will count as government spending in the
deficit-before-grant equation.

-- J.H.


Lonhro and Child Labor

The British-based multinational Lonhro is probably the largest foreign
investor in post-independence Mozambique. Lonhro backed both sides from
1982, when it reopened its sanctions-closed oil pipeline from the
Mozambican port of Beira to the newly independent Zimbabwe. To keep
Renamo from sabotaging the pipeline, then Lonhro head Tiny Rowland
promised Renamo $2 million per year, according to author Alex Vines.
Rowland publicly backed the Mozambican government and invested in large
farms, gold mines and the rehabilitation of the Hotel Cardoso in Maputo.
Rowland also played a key role in getting Renamo head Afonso Dhlakama to
enter peace talks with the government.

Rowland's role seems to have benefitted all parties -- Renamo,
Mozambique's government and Lonhro itself -- which seems to have gained
access to land and mineral rights at knock-down prices. The departure of
Rowland has not reduced Lonhro's involvement; on February 19, 1996,
Lonhro's new head, Dieter Bock, signed a major oil exploration agreement
under which the company has agreed to invest as least $8 million in
Mozambique.

Lonhro's cotton plantations caused a furor in early 1996, when the local
media reported that small children were picking cotton on Lonhro
plantations instead of going to school. A health worker was shocked to
see children being loaded into Lonhro lorries, some "so small they could
not see over the side." The news agency AIA reported on June 18 that the
children earn 25 cents a day, half the adult rate. A Lonhro spokesman in
London, John Simmons, said Lonhro does not actually employ children, but
he admitted that they did go to the fields to "help" their parents.

-- J.H.