After two devastating cyclones and a deadly uptick in terrorist activity in the northern province of Cabo Delgado, Mozambique’s economy was starting to recover—only for the coronavirus pandemic to throw a fresh wrench into Maputo’s finances. Earlier 2020 growth forecasts of 5.0% have been slashed, with the Economist Intelligence Unit (EIU) recently predicting that Mozambique’s economy might contract by 2.4% this year.
The LNG hopes which buoyed the higher growth hopes have been dashed. As it cuts expenditures worldwide, amidst a tumbling stock market performance, Exxon Mobil postponed its final decision on its proposed natural gas project in northern Mozambique’s Rovuma Basin. Industry consultants believe that other multinational companies, such as Total, may also delay their fuel projects in Mozambique—something that would make it more difficult for Maputo to service a $900 million Eurobond it restructured last year.
Despite these economic setbacks, there are a number of positive signs explaining why the International Monetary Fund (IMF) is more sanguine than the EIU in its predictions. The IMF, which has granted Maputo emergency debt relief to help it respond to its immediate liquidity needs, is estimating that Mozambique could still see the growth of 2.2% this year despite the pandemic. Among these bright spots in the fuel marking programme which has given a much-needed boost to tax revenues.
Fuel represents roughly 10% of Mozambique’s total state revenue, making it a vital part of the country’s budget. Fuel smuggling and adulteration, however, have long been major issues draining Maputo’s coffers and enriching criminal gangs. The illicit oil trade is a problem across Africa, costing the continent nearly $100 billion a year—but the so-called Maputo Corridor, comprising South Africa, Swaziland, and Mozambique, had emerged as a regional hotspot for the under-the-table business. A pilot study in 2013 and 2014 suggested that Mozambique was losing as much as $60 million a year thanks to this criminal activity.
In order to fight the scourge of fuel fraud, Mozambique carried out a tender in June 2017 for a fuel marking service. Such schemes cut down on smuggling and adulteration by adding a chemical substance to fuel. This chemical is invisible to the naked eye and does not affect the fuel’s quality, but allows officials to authenticate the product and ensure that it hasn’t been smuggled or tampered with.
As reported recently in Mozambican media, the programme has resulted in an impressive uptick in tax revenues from fuel sales: in 2019, Maputo collected 18 million meticais, a 12% increase on the previous year’s figures. As Berta Macamo, the customs commissioner in charge of the fuel marking scheme, explained, the taxes recouped would have been even higher if cyclones Idai and Kenneth had not thrown the fuel industry into disarray.
The fuel marking programme has also provided Mozambican authorities with valuable insights into how organised crimes groups carry out fuel fraud. Other than outright theft or smuggling, one of the main mechanisms of fuel fraud involves diluting fuel with cheaper hydrocarbons such as kerosene. Retail stations are often completely unaware that they are selling adulterated fuel. While Mozambican authorities were aware that this bait and switch was occurring, before the fuel marking scheme they had difficulty proving it.
The country registered a shocking collapse in kerosene demand after implementing the fuel marking programme. Kerosene consumption in 2017 was 11.1 million litres—after Maputo started marking its fuel, demand slumped to a mere 1.1 million litres, cementing officials’ suspicion that there had been widespread adulteration of diesel. This adulterated fuel, in addition to robbing the government of vital tax revenue, caused significant damage to the vehicles using it, as well as the environment.
The current contract for the fuel marking scheme expires in a few months, but it seems highly likely that Maputo will choose to continue the programme. Mozambique’s long-term recovery—from both the public health crisis and the economic damage it has wrought—will depend on sustainable sources of revenue. The country’s woefully underfunded healthcare system could be severely strained by the pandemic—but recent research suggested that a 5% uptick in tax rents could allow Mozambique to double its healthcare spending without increasing its already-substantial debt burden. In the wake of the pandemic, effectively collecting tax revenues from the fuel sector will be more vital than ever.