US embassy cable - 05MAPUTO1594

UNCLAS SECTION 01 OF 03 MAPUTO 001594 
 
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: NOVEMBER ECONOMIC DIGEST 
 
REF: MAPUTO 1449 
 
MAPUTO 00001594  001.2 OF 003 
 
 
1. This is a brief summary of significant economic 
developments in Mozambique during November 2005.  We provide 
it as a supplement to our other reporting.  The items 
discussed are: 
 
2.    Bank of Mozambique Denies Forced Conversion Rumors 
3.    Mozambique Moving Towards Tax Process Reform 
4-5.  Ministry Warns Against Illegal Land Sales 
6.    Fuel Prices Increase a Second Time in Five Weeks 
7-8.  Mozambique's ENH to Own Stake in Gas Pipeline 
9-10. Mozambique Signs Tourism Agreement with Portugal 
11.   Currency Revision Bill Approved 
12.   Cahora Bassa Now Mozambique's 
 
 
Bank of Mozambique Denies Forced Conversion Rumors 
 
2. Amidst exchange rate volatility and a recent tightening on 
the amount of foreign currency that can be withdrawn from 
personal accounts per week, rumors have been circulating that 
the Bank of Mozambique intends to force conversion of foreign 
currency accounts into meticais.  While the Bank of 
Mozambique categorically denied these rumors at the start of 
November, there continues to be some concern on the street. 
Unease over the fluctuating exchange rate spilled into the 
National Assembly, with opposition parliamentarian Maximo 
Dias accusing the Bank of Mozambique of "speculating on the 
dollar" during a statement to the Assembly of the Republic in 
late November.  Finance Minister Manuel Chang rejected the 
accusation, stating that the GRM has no intention of 
returning to a fixed exchange rate. 
 
 
Mozambique Moving Towards Tax Process Reform 
 
3. The first reading of Mozambique's proposed tax process 
reform bill unanimously passed its first reading in the 
National Assembly this month.  The bill, which defines what 
constitutes a tax crime and sets penalties for violations, 
passed with little controversy.  Under the proposed bill, 
fines for serious offenses reach 100 billion meticais 
(approximately 3.6 million USD), with the possibility of 
prison terms.  The only debate centered on these significant 
penalties.  According to opposition party member Maximo Dias, 
the "unrealistically" high fines open the door for corruption 
between tax violators and officials.  Finance Minister Chang 
focused on the proposed law's creation of a system of rights 
and duties between the taxpayers and the tax administration. 
Under the new law, taxpayers who feel they are overcharged 
will have a clear right of appeal and will be reimbursed if 
they successfully prove their case. 
 
 
Ministry Warns Against Illegal Land Sales 
 
4. In a November 17 public statement signed by the Mozambican 
Minister of Agriculture, Tomas Mandlate, the GRM warned the 
public against the illegal sale of land.  The statement came 
in response to recent public advertisement of "land sales" in 
the media and on the Internet.  The Mozambican constitution 
specifically prohibits the sale or alienation of land; all 
land in Mozambique is state property, with individuals and 
business possessing use rights. 
 
5. Inclusion of a clause regarding collaterization of these 
land use rights in the GRM's draft Action Plan for the 
Reduction of Absolutely Poverty (PARPA II) sparked heated 
public debate on November 23 at a meeting of the "Poverty 
Observatory."  Civil society groups objected to inclusion of 
the clause on the basis that the issue had never been raised 
in preparatory public hearings in the districts and 
provinces.  As a result of this objection, the GRM agreed to 
remove the land collaterization clause from the current PARPA 
II draft.  CTA and other private sector organizations have 
objected to removal of the clause, stating that 
collaterization of land rights is critical to commercial 
agriculture development. 
 
 
Fuel Prices Increase a Second Time in Five Weeks 
 
MAPUTO 00001594  002.2 OF 003 
 
 
 
6. On November 24 the GRM increased fuel prices for the 
second time in five weeks.  This increase raised jet fuel 
prices by 19.1 percent, diesel by 11.7 percent and petrol by 
6.8 percent.  The price of kerosene, the "fuel of the poor" 
also increased by 10 percent, while LPG cooking gas rose by 
7.6 percent.  Only the price of fuel oil remained stable. 
The Ministry of Energy supported its decision to raise fuel 
prices again, citing the increase in import prices of all 
petroleum products other than fuel oil.  Media reports also 
blame the devaluation of the metical, which lost 11.1 percent 
of its value against the dollar over the last two months. 
Fuel imports are denominated in dollars and the GRM is 
supposed to adjust fuel prices whenever the import price in 
meticais moves by more three percent, as well as whenever 
there is a change in the fuel tax.  The adjusted prices 
reflect only the cost where fuel is unloaded -- Maputo, 
Matola, Beira and Nacala -- and do not include the 
transportation costs retailers may add to the final fuel 
price. 
 
 
Mozambique's ENH to Own Stake in Gas Pipeline 
 
7. The South African petrochemical, SASOL, owns the gas 
pipeline from Inhambane province to South Africa, however 
Mozambique's publicly owned National Hydrocarbons Company 
(ENH) has an option to purchase up to 25 percent of the 
pipeline company's stock.  As the result of loan funding from 
the European Investment Bank (EIB), ENH will now exercise its 
option and acquire 11 percent of the pipeline.  ENH is 
exercising its option through a subsidiary, Mozambique 
Pipeline Company (CMG), which is 80 percent owned by ENH and 
20 percent owned by IGEPE, a government entity handling state 
shareholdings.  At the November 15 signing of the loan 
agreement, Issufo Abdullah, chairman of ENH, stated that 
negotiations with other financial institutions continue in an 
attempt to raise money for the remaining 14 percent of the 
pipeline company. 
 
8. The loan, valued at 35 million Euros (approximately 42 
million USD) is interest-free and scheduled to be paid back 
out of dividends over the next 20 years through a 50-50 
profit-sharing plan between EIB and ENH.  Should no dividends 
(profits) result from the pipeline, the profit-sharing plan, 
and therefore the payback, would be postponed.  According to 
Abdullah, the plan is to privatize CMG by publicly selling 
ENH's 80 percent to Mozambican investors. 
 
 
Mozambique Signs Tourism Agreement with Portugal; Record 
Numbers Visited in 2004 
 
9. On November 26, Prime Minister Luisa Diogo said that 
711,000 tourists visited Mozambique in 2004.  Mozambique now 
has 5,030 hotel and tourism establishments, up from 2,075 in 
1990.  The tourism industry employs more than 32,000 people, 
up from 19,600 in 1990.  According to Diogo, these numbers 
represent Mozambique's growth in tourism, an industry the GRM 
seeks to promote with its six national parks, six 
conservation reserves and 12 hunting areas. 
 
10. The Mozambican tourism industry received an additional 
boost this month from the signing of a tourism agreement with 
Portugal.  The memorandum, signed on November 29 in the 
tourist resort of Bilene, commits Portuguese technical 
assistance in creating a new set of regulations to enhance 
Mozambique's tourism law. 
 
 
Currency Revision Bill Approved 
 
11. A bill proposed to simplify the country's currency passed 
its second and final reading in the National Assembly and is 
awaiting signature by President Guebuza.  The bill would 
simplify Mozambique's currency by removing three zeros. 
Starting January 1, 2006, the "new family" of metical will be 
unveiled and one new metical will equal 1,000 old meticais. 
The name of the currency will remain unchanged, and old notes 
and coins will remain legal tender for a transition period. 
 
 
 
MAPUTO 00001594  003.2 OF 003 
 
 
Cahora Bassa Now Mozambique's 
 
12. Declaring it a "second independence," President Guebuza 
lauded the recent Memorandum of Understanding to transfer 
control of the Cahora Bassa dam to Mozambique as a "historic 
landmark" (reftel).  Under the agreement, the Portuguese 
state will transfer control of Cahora Bassa Hydroelectric 
(HCB), the dam operating company, in exchange for 950 million 
USD.  Mozambique will then hold 85 percent of HCB, with 
Portugal maintaining control over the remaining 15 percent. 
According to reports, the terms of the agreement state that 
HCB must pay Portugal 250 million USD, in two installments, 
during 2006.  The first installment is due in January, the 
second in October.  In addition, the remaining 700 million 
USD must be paid to Portugal within 12 months of the signing 
of the final negotiations - expected to happen before the end 
of this year.  Should exceptional circumstances arise, HCB 
may reportedly extend this payment period to 18 months, 
provided 350 million USD is paid on time under the terms of 
the agreement.  The 700 million USD will have to be raised by 
HCB (Note: The GRM will have no contingent liability as the 
as the 700 million USD will be borrowed by HCB, walled off 
from the GRM. End note.) 
La Lime