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Richard Talley

Richard Talley

Richard is a former commodities analyst currently working as a freelance consultant involved in the development of copper mines.

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Can Mozambique Avoid The ‘Resource Curse’?

On Monday morning, Mozambican soldiers opened fire to disperse protesters calling for natural gas projects to be suspended until more pressing issues, particularly fundamentalist insurgents, are dealt with. Nonetheless, Mozambique seems determined to push ahead with LNG development, hopeful that the huge gas deposit discovered off its northern coast in 2010 could lift the country out of the ranks of the world’s poorest.

It’s not only the protesters who are skeptical, however: analysts have raised fears that Maputo could be hit by the ‘resource curse’, in which newfound resource wealth brings increased hardship rather than economic growth. This fate, observed in numerous other emerging economies, is nevertheless not inevitable. Mozambique must learn from these countries’ mistakes and emulate those nations, such as Norway, Qatar and Botswana, which have used their oil and mineral reserves as a springboard for long-term sustainability.

Green light for exploration despite ongoing troubles

Mozambique’s first LNG project is already under construction, while two even bigger undertakings, helmed by ExxonMobil and Anadarko, will receive final investment decisions in 2019. Both projects have already secured off-take commitment, with major companies including Qatar Petroleum joining the exploration. By the mid-2020s, Mozambique could be the world’s sixth biggest LNG producer, transforming the country into a genuine regional power.

Yet Mozambique is still coping with the scars from its 15-year civil war; tension remains high between the government and the REMATO rebels. This political instability has led to rampant graft which analysts warned just last week will make it difficult for Mozambique’s LNG prospectors to ensure long-term funding.

Turmoil and corruption sapping revenues

This is a worrying theme to anyone who’s observed the plight of resource-rich countries such as the Democratic Republic of the Congo (DRC), Nigeria, Angola, and Papua New Guinea. Each of these countries discovered huge oil or mineral riches, only to have the bounty drained by a combination of political turmoil and endemic graft. Related: Global Automakers To Spend $300 Billion On EVs In 10 Years

The DRC provides perhaps the most tragic example: the sprawling Central African country should be a global powerhouse given its reserves of oil, copper, gold, diamonds and cobalt—the demand for which is set to rise exponentially thanks to its use in lithium batteries. Yet decades of fighting and a postcolonial political vacuum have left it among the world’s poorest countries. A litany of armed groups continue to spar over the DRC’s mineral troves, using the proceeds to buy weapons—meaning that the country’s natural wealth is actually fueling its own agony.

It’s a familiar tale around the globe. Nigeria, home to the world’s 11th-largest oil reserves, is racked by internecine tension. Repeated attacks on oil operations in the Niger Delta have enabled unscrupulous insiders to steal up to one million barrels per day. In South Sudan, locked in conflict since its foundation, officials have siphoned off oil proceeds, squirreling them away overseas. Far from bringing Papua New Guinea economic prosperity, its vast swathes of LNG reserves have inflamed decades-old tensions between rival clans, who have blocked the gas plants.

Blindingly short-sighted

Alongside these endemic political problems, each ‘cursed’ country has made the same fundamental economic error: instead of using their resources to fund long-term investment and evolution, they have allowed these natural bonanzas to engulf all other areas of the economy. Nigeria, for example, was once the world’s second-biggest producer of cocoa, and exported large amounts of rubber and palm oil. But these plentiful reserves were sidelined when oil was discovered in the 1950s, with oil and gas now accounting for nearly 40% of GDP.

The Angolan government has been even more myopic—oil now constitutes 95% of Luanda’s total exports. As a result, Angola and Nigeria are ever-more vulnerable to fluctuations in global commodities markets; indeed, the oil price shock has had a seismic effect on both countries, pushing up government debt and jeopardizing the countries’ credit profiles.

To make matters worse, many of the resource curse’s victims have allowed themselves to be sucked in by China’s promise of cheap loans. Under the pretext of its ‘Belt and Road’ trade strategy, Beijing has offered quick cash to developing countries, then seized their assets when the repayments get too steep. Many countries with abundant natural resources, struggling with mounting debts, have given in to the temptation of Chinese investment. As a result, Beijing is scooping up natural treasures across the developing world, controlling Congo’s cobalt and allowing South Sudan and Angola to pay off debts in crude, leaving the countries with little oil to sell themselves.

Positive examples

Thankfully, a number of resource-rich countries have avoided the ‘curse’ through proactive economic strategies. Norway, which has plowed its oil rents into a vast sovereign wealth fund which now owns 1% of the world’s stocks, is an obvious example. Fellow natural gas hub Qatar (and competitor for the world’s richest country per capita), which has used the Saudi-led blockade as a spur to accelerate its diversification away from hydrocarbons, is another.  Related: Fears Of U.S. Shale Demise May Be Overblown

Doha’s own wealth fund has pivoted towards an ambitious new strategy to build an economy independent from gas revenues, supplementing high-profile purchases such as London’s Grosvenor Hotel with significant investment in industry and agriculture and a joint initiative with Malaysia and Turkey to corner the Islamic finance market. With the emirate’s economic growth expected to exceed 3% for the next three years, it’s clear this strategy is bearing fruit.

Perhaps the most relevant case study for Mozambique is nearby Botswana. The government has reinvested profits from its lucrative diamond mines in foreign-exchange reserves, which have in turn stimulated Gaborone’s manufacturing and services sectors as well as bankrolled investment in health and education. As a result, Botswana has enjoyed a prolonged period of steep economic growth and rising revenues from non-mining sectors.

Encouragingly, Mozambique is already talking about following in Norway, Qatar and Botswana’s footsteps. At the dawn of Maputo’s LNG boom, the government is targeting progress in fisheries and agriculture; a number of significant infrastructure works, including a national electrification scheme, are in the pipeline. But with the country mired in lingering uncertainty, sustainably managing the country’s natural resources is sure to bring plenty of challenges ahead.

By Richard Talley for Oilprice.com

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