VZCZCXRO5175
RR RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #1002/01 2211203
ZNR UUUUU ZZH
R 091203Z AUG 06
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 5824
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLMC/MILLENNIUM CHALLENGE CORP  0069
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLI/AMEMBASSY LISBON 1280

UNCLAS SECTION 01 OF 03 MAPUTO 001002 
 
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 - July Economic Digest 
 
 
MAPUTO 00001002  001.2 OF 003 
 
 
¶1. This is a brief summary of significant economic 
developments in Mozambique during July 2006.  We provide it 
as a supplement to our other reporting.  The items discussed 
are: 
 
-- Labor Law Draft in Limbo 
 
-- 25% "Incentive" Given to Entrepreneurs After the Fact 
 
-- EU Continues to Hold Up Agreement on Mozambique's Planned 
Purchase of Cahora Bassa Dam 
 
-- President Guebuza Names New Central Bank Governor 
 
-- Fiber Optic Link with South Africa Inaugurated 
 
-- Government Plans Increased Butane Storage 
 
-- Fuel Price Increases Avoided Due to a Strong Metical 
 
-- Mozambique Signs Third Framework Agreement with UN 
 
-- Japan to Support the Nacala Development Corridor 
 
-- Sweden to Assist with Alternative Fuel Development 
 
 
Labor Law Draft in Limbo 
------------------------ 
 
¶2.  The Mozambican Council of Ministers forwarded a version 
of the revised labor law to the National Assembly for review 
and approval at its next session (October - December).  This 
version differs substantially from the version drafted and 
approved at the technical level by the tripartite commission 
charged with revision the current labor law.  (Note: This 
tripartite commission included members of the government of 
Mozambique, union leaders and representatives from the 
private sector.  End note.)  Despite initially signing off 
on the commission's draft, Minister of Labor Taipo later 
submitted a different and more employee-friendly version to 
the Council of Ministers.  It is still unclear what the 
final version will look like; the Assembly is unlikely to 
debate this politically charged issue until after Frelimo's 
National Congress in mid-November. 
 
 
25% "Incentive" Given to Entrepreneurs After the Fact 
--------------------------------------------- --------------- 
 
¶3.  Local media reported that the government of Mozambique 
recently gifted up to 25% of the cost of companies purchased 
by Mozambican individuals during the privatization of 
national companies (which occurred mainly in the late 1980's 
and 1990's).  The gift is being described as an incentive, 
even though the deals were signed years ago.  The decree 
states that all companies and employers who have already 
paid 75% or more of their debt are forgiven the remaining 
amount.  Both the private sector and the unions have 
applauded the move.  Representatives of CTA, the private 
sector umbrella organization, many of whose members are 
affected by this decision, declared that this would increase 
Mozambican competitiveness since it reduces the difficulties 
many companies have in paying their contractual obligations. 
 
EU Continues to Hold Up Agreement on Mozambique's Planned 
Purchase of Cahora Bassa Dam 
--------------------------------------------- -------- 
 
¶4.  The transfer of the Cahora Bassa hydroelectric dam to 
Mozambican control continues on hold due to European Union 
concerns.  Mozambique signed a MOU with the Portuguese 
government in November 2005, under which Portugal was to 
transfer a majority of its shares in HCB (the dam holding 
and operating company) to Mozambique for 950 million USD. 
The deal is subject to EU review, however, to ensure that it 
will not push Portugal's budget deficit beyond previously 
agreed limits.  According to the Mozambican government, this 
review has been the main reason for the delay in the signing 
of final documents and transfer of ownership for past eight 
 
MAPUTO 00001002  002.2 OF 003 
 
 
months.  In his recent trip to Guinea Bissau, President 
Guebuza demanded a rapid conclusion to the Cahora Bassa 
transfer, stating that he negotiated with Portugal and not 
the European Union. 
 
¶5.  Comment: It is unlikely that President Guebuza's demand 
to accelerate the process will be met, as the transfer is 
technically complex and its impact on Portugal's overall 
budget deficit unclear.  Jose Manuel Durao Barroso, the 
former Portuguese prime minister who is Chairman of the 
European Commission, recently admitted that the issue likely 
will take some time to solve.  According to Durao Barroso, 
the EU is still trying to determine whether the deal will 
push Portugal's budget deficit above the 3% threshold 
required under the EU's stability pact. 
 
¶6.  Comment Continued: The issue is potentially further 
complicated by clauses in the transfer agreement requiring 
Mozambique to use Portuguese contractors for a future north 
bank powerhouse, estimated to be worth around USD 1 billion, 
as well as all future maintenance work on the dam.  It 
addition, the agreement also promises preferential treatment 
to Portuguese companies for other projects in the energy 
sector.  Internally, there are also concerns that this 
amounts to an effective re-nationalization of Cahora Bassa, 
something that not only runs counter to the government's 
stated policy of privatization but raises concerns about the 
government's technical capacity to keep the dam operating 
properly.  End Comment. 
 
President Guebuza Names New Central Bank Governor 
--------------------------------------------- ----- 
 
¶7.  On July 24 President Guebuza appointed Ernesto Gove as 
the new governor of the Bank of Mozambique.  This is a five- 
year appointment.  Gove replaces Adriano Maleiane, who held 
the post for 15 years.  Previously, Gove served as 
Maleiane's deputy.  At Gove's swearing-in ceremony, 
President Guebuza challenged him to persuade commercial 
banks to open more branches in rural districts and to 
improve banking services. 
 
Fiber Optic Link with South Africa Inaugurated 
--------------------------------------------- - 
 
¶8.  On July 14 Antonio Mungwambe, Minister of Transport and 
Communications, inaugurated the first fiber-optic link 
between Mozambique and South Africa.  This link represents a 
new phase in Mozambique's national telecommunications 
program, which, according to Mungwambe, calls for expanding 
the capacity and improving the quality of fixed and mobile 
phone communications around the country, as well as 
internet, radio and television capabilities. 
 
Government Plans Increased Butane Storage 
----------------------------------------- 
 
¶9.  In response to recent supply difficulties, the 
Mozambican government proposes to expand storage capacity 
for fuels, with an emphasis on butane gas.  To achieve this 
goal, Petromoc, the state oil and fuel distribution company, 
is currently assessing the possibility of rehabilitating 
storage tanks located in the Maputo suburb of Matola. 
Currently Mozambique has storage capacity for approximately 
700 tons of butane, only enough to last 15 to 20 days. 
Under the government plan storage capacity would increase to 
an amount sufficient for 35 to 45 days.  The government also 
hopes in the near future to produce its own gas from 
Mozambique's natural gas reserves in Inhambane province, 
though such a plan is only notional at the moment. 
 
Fuel Price Increases Avoided Due to a Strong Metical 
--------------------------------------------- --------- 
 
¶10.  Due to the strength of the national currency, the 
metical, the government's monthly review of fuel prices 
showed a 3.8 percent increase in the cost of diesel.  All 
other fuel prices either remained stable or dropped.  The 
cost of fuel oil fell by 16.8 percent and the cost of 
cooking gas by 6.8 percent.  Salvador Namburete, the Energy 
 
MAPUTO 00001002  003.2 OF 003 
 
 
Minister, warned the public that future fuel price increases 
were inevitable, despite this month's reprieve. 
 
Mozambique Signs Third Framework Agreement with UN 
--------------------------------------------- ------ 
 
¶11.  On July 27 Mozambique and the UN signed a framework 
agreement covering UN development assistance to Mozambique 
for 2007-2009.  Under this third framework agreement between 
Mozambique and the UN, the UN will disburse over USD 300 
million to support government reform, fund training programs 
and combat HIV/AIDS. 
 
Japan to Support the Nacala Development Corridor 
--------------------------------------------- --- 
 
¶12.  During a visit of Japanese parliamentarians to 
Mozambique, Yoshinori Ohno, Chairperson of the Japan- 
Mozambique Parliamentary Friendship League, announced that 
Japan will assist in an economic viability study of the 
Nacala Development Corridor - the railway track from the 
northern port of Nacala inland to Malawi.  This assistance 
will be part of Japan's overall aid package to Mozambique. 
 
Sweden to Assist with Alternative Fuel Development 
--------------------------------------------- ------ 
 
¶13.  Swedish technicians are currently working with the 
Mozambican government to help develop an alternative fuel 
industry.  The focus of the work is the production of 
ethanol.  The government believes there is the potential to 
supply the entire Mozambican market, as well as export 
surplus to Europe (including Sweden).  Petromoc 
(Mozambique's oil parastatal) and the Ministry of Energy are 
also exploring the potential of producing bio-diesel. 
Several Mozambican vegetable oil producers are currently 
participating in a bio-diesel pilot program, with some 
assistance provided by the U.S. NGO TechnoServe. 
 
Dudley