A Risky Bet: The IMF’s Role in Mozambique’s LNG Development

Luísa Abbott Galvão (Friends of the Earth US) and Daniel Ribeiro (Justiça Ambiental/Friends of the Earth Mozambique) 

In March of last year, an influential Mozambican rapper and social activist known as Azagaia was found dead in his home at the age of 38. Azagaia’s lyrics critiqued not only colonialism and slavery, but also his country’s current leadership and development path. Among the topics Azagaia’s lyrics touched on is the massive liquefied natural gas (LNG) development set to happen in the north of the country, led by international gas majors TotalEnergies, ExxonMobil, and Eni. Over the last decade, the Government of Mozambique, international institutions and other stakeholders have based hopes for Mozambique’s economic development on the promises of exporting LNG from its northernmost province of Cabo Delgado, and the “windfall” revenues that the country could receive from this. 

In his lyrics, Azagaia raises several critiques of fossil gas development in Mozambique, making the case that it is a bad deal for the country. He alludes to the fact that many of the companies behind these projects are foreign (TotalEnergies is French, ExxonMobil is American, Eni is Italian, etc.), highlighting the concern that they are making profits from a Mozambican resource without actually enriching the country and its people. His lyrics also reference the issue that most of this gas is for export to Asian markets, and won’t lead to the creation of a domestic industry or lasting jobs in Mozambique. Despite several independent economic studies corroborating the concerns echoed in Azagaia’s music, he was unique as a public figure in speaking out against LNG development, as doing so was, and continues to be, a highly risky move in a context of increasing civil repression. 

Serious financial, social, environmental, and climate risks aside, the development of LNG in Mozambique has also been tangled up in a corruption scandal of international scale, and a devastating militarized conflict impacting over a million people. 

Two of the largest LNG projects in Mozambique (led by TotalEnergies and ExxonMobil) have been on hold for the last couple of years as a result of the conflict around the project site, but their fate is set to be decided any day now. As the conflict evolves, and security and production costs rise, several financiers are re-assessing whether to invest, and several of the prospective buyers are said to be re-assessing their purchases of Mozambique LNG. Meanwhile, Mozambique’s debt sustainability and economic development prospects hang in the balance, which will impact the future of millions of Mozambicans. 

While much is being said about the producers, financiers and buyers of LNG in Mozambique, less is being said about the insidious role that has been played by the “enablers and validators”. These are the seemingly neutral so-called “authorities” that have given credence to the notion that massive LNG development in Mozambique would transform the country and even contribute to the global clean energy transition, and that have supported policy changes in Mozambique to encourage investments in LNG. This blog breaks down the critical role that a little-understood international financial institution – the International Monetary Fund (IMF, or Fund) – has played behind the scenes in quietly pushing Mozambique to the predicament it finds itself in today in pursuing gas for development. 

The International Monetary Fund – An enabler and validator of LNG buildout

The IMF is a global organization with a mandate to promote financial stability and monetary cooperation in order to achieve sustainable growth and prosperity for its 190 member countries. Its governance is dominated largely by its largest shareholders, the U.S. and other advanced economies. The IMF operates in three main ways: It provides crisis lending to countries (with conditions that often include local policy changes); it conducts reports of countries’ “economic health” and provides policy recommendations; and it provides technical assistance and training to help governments implement “sound” economic policy. This may all seem abstract, but the influence –still largely market-friendly– that the IMF has on countries’ macroeconomic policies and the development paths that they pursue have repercussions for millions of people, especially those from low and middle-income countries. 

The IMF has been a leading voice premising Mozambique’s development on LNG going forward, rather than helping the country address climate transition risks and diversify its economy. It has enabled Mozambique’s risky LNG development in several ways – some direct, like through lending conditionalities and policy advice, and others indirect, like lax risk assessments and over-optimistic fossil revenue projections embedded in debt sustainability analyses. It has not only supported the policy framework to encourage public and private investments in LNG, it has undermined its risks and overstated its promises, with worrisome implications for Mozambique’s debt and development situation going forward. Below are the ways that the IMF has enabled and validated this risky bet. 

Helped create a policy framework to encourage public and private investments in LNG—

The IMF has helped to create an enabling investment environment for gas through the policy reform conditionalities included in its loan programs with Mozambique. As researcher Heike Mainhardt has studied, an IMF loan to Mozambique in 2015 supported: The creation of new tax policies that provide subsidies for coal and gas producers; new legislation that provided substantial benefits to Export Credit Agencies (ECAs) instrumental to clenching the public finance of 8 ECA’s for a $15 billion financial package for LNG Area 1; and assessment criteria and selection of priority infrastructure projects to receive public finance (which included fossil fuel projects). 

Over-optimistic LNG revenue projections validated a harmful and risky development path, and fueled corruption and conflict– 

In a 2016 country report on Mozambique (issued shortly after the Paris climate agreement was agreed, no less), the IMF projected that tapping into Mozambique’s vast fossil gas reserves would provide over half a trillion dollars of fiscal revenue to the country over the projects’ lifetimes. The country’s GDP was projected to grow 34% in 2021 alone. This would catapult Mozambique, one of the poorest countries on earth, to middle-income status or even transform it into “the Qatar of Africa”, as many have likened. Investors poured in from all over, including from a dozen export credit agencies and private finance firms, and from public development institutions like the African Development Bank. This became the single largest Foreign Direct Investment in all of Africa, ever. It felt to most people like a sure deal that fossil gas would transform the country. And the IMF’s lofty projections both drove, and lent a stamp of validation to, the inflated expectations that were being raised.

This is even though the IMF itself has analysis showing that “in countries with weak governance, economic growth rates tend to fall, not rise in the years following a major oil or gas discovery,” a phenomena dubbed “the presource curse.” Indeed, as Jonathan Gaventa analyzed, “The economic growth projected for Mozambique has not materialized. In sharp contrast to the IMF’s projections in 2016 for 34% GDP growth in 2021, actual economic growth in Mozambique is likely to be around 2.5%. Annual growth rates have progressively fallen in the decade since the gas was discovered, rather than rising […].”  

The IMF also has a troubling history of making over-optimistic growth assumptions around the world, particularly related to new oil and gas development. This lends dangerous credibility to investments that are not necessarily prudent for host governments. It also encourages host countries to take on more debt and for creditors to lend more, with the assurances that future revenue from oil and gas will be available to pay it off. When this revenue does not materialize, countries are left without the money needed to pay back their debt, often having to cut social spending as a result, with disproportionate impact on women and vulnerable groups. It also leads the IMF itself to engage in reckless lending by making loans to countries with debt burdens that are actually unsustainable. In other words, the IMF cannot provide a country with loans if it cannot demonstrate that the country will be able to pay them back, so the IMF has an inherent conflict of interest as a creditor in making growth and debt sustainability projections. It is for this reason that civil society calls not only for reforms in the methodology used by the Fund and World Bank for conducting Debt Sustainability Analyses, but more fundamentally, for an independent institution, potentially under the UN, to carry these out.  

In 2016, a corruption scandal rocked the country when it was discovered that a clique inside the Government of Mozambique had taken out secret loans from London-based bank branches for three state-owned companies without parliamentary approval as required by law, and disappeared with the money. One of the enablers of this “secret debt scandal” was the discovery of gas and assurances that the debt could be repaid with future LNG revenue. 

As a new report by Debt Justice analyzes, despite the fact that these loans have since been deemed illegal, the government has been repaying some of them, and, as part of a restructuring agreement on one of the loans, “creditors will receive 5% of yearly revenues the country generates from LNG projects up to $500 million, keeping the country locked in LNG production, while also undermining gas advocates’ claims that LNG will have a wider positive developmental impact in the country.” The secret debt scandal resulted in the IMF and other donor countries pausing budget support to the country, which has cost the people of Mozambique at least $10 billion in total, and has pushed over 2 million people into poverty. 

Corruption arising from the mere promises of LNG development have already cost the country more than the wealth that LNG development could generate for the country over the projects’ lifetime. 

While gas exploration was not a direct cause of the militarized insurgency in the north of the country around the projects’ site, it fanned the flames of a complex conflict that was already brewing over multifaceted local grievances related to poverty and inequality, elite capture, and unequal access to resources like gemstones, and now gas. As a result of the conflict, which has displaced more than a million people, TotalEnergies declared “force majeure” and paused its project in 2021. Exxon is waiting to make its Final Investment Decision depending on how Total moves. The project delays have led to an increase in production costs and government security spending, and their resumption is not yet assured. Even so, the most recent July 2023 Debt Sustainability Analysis prepared by the IMF and World Bank continues to paint a rosy picture, projecting that “Public debt is assessed as sustainable in a forward-looking sense because a large share of projected future borrowing reflects the state’s participation in large LNG projects, which will be repaid directly from future LNG revenues (which are expected to be significant).”

Inadequate risk assessments have validated an essentially bad deal — 

A 2021 financial analysis by the German thinktank Open Oil lays out why the LNG projects are disadvantageous for Mozambique. The researchers studied several gas development scenarios, and found that in the most realistic scenario (at the time of writing):  

1) The revenue that Mozambique will receive from gas is much lower than that projected by the Government. Seventy percent of what Mozambique will earn in revenue from gas will only come after 2040, and that value is estimated at around only $3.4 billion in today’s money.  

2) Billions will be lost through tax structures in Dubai. The study estimates that since the special purpose vehicles are set up in the United Arab Emirates, Mozambique will face a $5.3 billion net revenue loss due to effective exemption from taxes on dividends and interests. Compare this to the 20% they would have paid under the Mozambique fiscal regime.

3) The Government’s stake in the projects through its oil and gas company is virtually worthless and could become a liability. The state oil and gas company took out $16 billion in loans to finance its stake in Areas 1 and 4 gas projects. It will only make revenue once it has paid back its loans and other current debts, which could result in very little to no net revenue. Or it could even become a liability, depending on the interest rates of its loans and on the price of gas. 

4) Most of Mozambique’s gas is already potentially stranded. The acceptable rate of return on investment is usually 10%. But the project economics are very marginal in terms of historical targets for the industry: Open Oil estimates a rate of return of only 7.53% under the base scenario for Golfinho in Area 1 and 7.98% Coral in Area 4. Only a price of over $8/mmbtu in 2021 and with a sustained increase could provide the Consortium with positive rates of return. Current gas price markers are at or below this level, and a looming oversupply of LNG on the market in coming years portends a plunge in gas prices and profits. 

The IMF has failed to acknowledge and address these independent financial analyses, which conflict with their own. This is concerning given that supporting countries’  financial stability is the IMF’s core mandate. 

Total silence on Mozambique’s legal liabilities and potential macroeconomic consequences – 

As the risks increase of LNG revenues not materializing, Mozambique finds itself in a bind: even if it wanted to avoid these financial risks and call off LNG projects moving forward, it can’t – thanks to clauses in several trade and investment treaties, Mozambique could be sued by investors for actions impacting “lost future profits”, to the tune of billions of dollars (known as ISDS – Investor-State Dispute Settlement). In fact, a study published in Science by a team of researchers at several universities estimating the costs of possible legal claims from oil and gas investors in response to government actions to limit fossil fuels found that Mozambique’s liability is the highest in the world. Worryingly, the study finds that fossil fuel investors have been successful in 72% of cases that were decided on the merits where the final award was disclosed. A new study by Columbia University estimates that Mozambique’s potential treaty and contract-based ISDS liabilities from oil and gas projects would cover almost a decade of Mozambique’s government expenditures for SDGs. 

The IMF has been conspicuously silent regarding Mozambique’s ISDS risks related to LNG development. This is despite the fact that the Fund has explicitly recognized ISDS as a barrier to “managing the macro-financial consequences of [fossil fuel] asset stranding.” In other words, the IMF itself has recognized that ISDS discourages countries from taking climate action (like calling off fossil fuel development) to prevent fiscal and financial risks to their economy (like if the fossil fuel value is set to depreciate). This is squarely within the IMF’s mandate to assess and advise on.

Public statements encourage LNG development — 

Rather than address the macroeconomic risks of Mozambique’s reliance on LNG exports in a post-Paris world, the IMF resident representative in Mozambique was quoted in a newspaper in December 2021 supporting LNG development on supposedly moral grounds: 

“Attempts to limit gas in Mozambique are “not sensible”, IMF representative in Mozambique, Alexis Meyer-Cirkel, said in an open briefing 23 November. “I think that this discussion, preventing Mozambique from developing this wealth, disproportionately penalizes a country that has not contributed to the creation of the problem and that is a poorer country,” he stressed.

While no one denies that Mozambique has the right to extract its fossil resources, doing so is not necessarily in its best interest. The IMF Resident Representative should stick to his mandate, rather than distort climate justice talking points and insist the country follow a disproven and risky development model for low-income nations in a post-Paris world. Indeed, an IMF paper finds that fossil fuel economies in Africa experience slower economic growth compared to non-fossil fuel exporting countries, as much as three times slower. Meyer-Cirkel himself acknowledged that African non-resource countries recovered better from Covid than resource countries because of their more diversified economies.   

Lack of support to Mozambique to help it diversify its economy — 

An IMF staff visit statement in December 2021 acknowledged that Mozambique needs to diversify its economy: “Economic diversification is a key challenge to raise productivity and avoid excessive dependence on natural resources.”

Despite this recognition, and the added layer of uncertainty around the projects going forward because of the conflict, a new 2022 IMF loan program with Mozambique – the first since the 2016 “hidden debt” scandal – does nothing to help Mozambique diversify its economy. Instead, it supports the creation of a sovereign wealth fund to “transparently manage LNG wealth” and “a framework to weather the impact of commodity price volatility on the budget.” As Jonathan Gaventa concludes, “while a Sovereign Wealth Fund can manage temporal volatility of revenues, it will do little to address the risk of revenues not materializing. (In any case, Mozambique may be better off using any revenues to pay down expensive debt rather than investing in an SWF).”

Paying lip-service to transparency and public accountability — 

In May 2022 – six months after the IMF Board approved the latest IMF loan program in Mozambique and its economic health check of the country (called Article IV consultation) — the IMF confirmed in the news that the Government of Mozambique had refused to allow these documents to be made public. While countries are allowed under the IMF’s governing Articles of Agreement to not publicize IMF surveillance analyses, this is rarely done. Disappointingly, the IMF’s Chief of Mission in Mozambique was quoted in local newspapers saying (translated from Portuguese): 

“‘I don’t think it is in the interest of the international community or foreign investors in the country,’ he said, seeking to undermine the ban on disclosing the documents that make up the request for financial assistance.” 

This is especially troubling given this analysis was linked to the first loan program with Mozambique since the “secret debt scandal.” The IMF’s public dismissal of this secrecy sends a troubling signal about the institution’s commitment to transparency and sound public financial management – goals that are not only part of the Fund’s purported values, but that are also at the heart of the Fund’s current program priorities in Mozambique. One and a half years later, at the time of writing this blog, the Fund’s webpage for Mozambique still has not been updated to reflect the Government’s decision.

Lack of accountability to human rights–

The human rights obligations of the IMF has been a matter of debate for several decades. As the NGO Bretton Woods Project has highlighted, the IMF is a member of the United Nations system, with the same duties to uphold universal human rights, as outlined in the Tilburg Principles. Yet, as Aldo Caliari has written, “The IMF considers that, as a monetary agency, international human rights law does not apply to it.” As civil society has argued for decades, this is not acceptable: “Economic decisions and policies are inherently tied to human rights because they relate to prioritization of essential needs and reflect power dynamics that impact civil political rights and redirect state resources.” 

The LNG projects in Mozambique are implicated in a range of serious human rights violations by several stakeholders, from forced displacement without adequate compensation, to extortion, sexual assault and extrajudicial killings on the part of the military, private security forces and mercenaries, to the disappearance of journalists. TotalEnergies is even being sued for involuntary manslaughter. Despite this stark situation, the IMF is continuing to support LNG going forward through its current loan program, public statements, and economic analyses. It is unacceptable that a public finance institution can wash its hands clean of human rights violations of a program that it enabled and supports. 

In Azagaia’s song “As Mentiras” (The Lies), he raps (translated to English):

It’s a lie that you’re independent
That you take your continent forward
You didn’t break the chain
You’re nothing but an unconscious slave
500 years of slavery
And the Europeans took 36 million slaves and only 16 survived
Now you call the European, the American or god knows who
To suck your oil and set up their homes here
But they don’t set up factories here, they just buy the barrel
On the mainland or in the diaspora
Independent Africans who impoverish our Africa

Another of Azagaia’s songs is called “Vender o Pais” (Sell the Country), in which he sings (translated into English):

Your people can’t take it anymore, Lord
In exchange for oil and gas they sell our country 

While significant harm has already been done and set in place in Mozambique, it is not too late for the IMF to correct course and speak out on the mounting macro-critical risks of LNG development in Mozambique and how to avoid these. The IMF could, for example, support Mozambique to urgently unwind itself from ISDS provisions in treaties and contracts it is party to that jeopardize its fiscal and financial stability. Additionally, as the IMF reviews its 2021 climate strategy in the coming year, and the Debt Sustainability Analysis for low-income countries, it is urgent that the IMF acknowledge and learn from its mistakes to avoid doing harm in other countries. The IMF needs to be pushed to recognize its human rights obligations under international law, to develop a human rights policy including assessments of the impacts of its policy advice, analyses, and conditionalities, and to create an accountability and remedy framework.