The Mozambican government and international financial institutions made bad deals, and it’s ordinary Mozambicans who will suffer.
Titus Gwemende is Oxfam’s Southern Africa Program Advisor on Extractive Industries.
For the last three weeks, nothing has dominated public conversation in Mozambique like the latest ‘debt scandal’. The government confirmed that between 2013 and 2014 it provided sovereign guarantees for state companies to borrow roughly $1.5 billion USD from Credit Suisse Group AG and VTB Capital Plc. A big chunk of the money was meant for tuna fishing boats, but was used instead to buy military vessels. To make matters worse, the loans were contracted in secrecy, without Parliamentary debate or approval, as required by law, and were not even registered in public accounts. Poor performance of the companies and other factors has resulted in their inability to pay back the money; and because the Mozambican government was guarantor of the loans, the $1.5 billion is now public debt.
As a result, the International Monetary Fund has suspended disbursements of $165 million USD of a $286 million USD emergency loan it agreed to with government in October 2015. The major bilateral donors also known as Group of 14 (G14) have also suspended budgetary support to Mozambique in protest. A lot of the coverage has correctly questioned and even criticized the Mozambique government over the secrecy, and its decision to back the operation with a loan guarantee that breached its own annual budgetary ceiling on external borrowing. Yet there are further questions beyond the government actions that Mozambicans deserve the answers to.
Could Credit Suisse and VTB have handled this better?
Though it has to be emphasized that the government is primarily responsible for adhering to its own laws, there are two key problems with how the financial institutions dealt with Mozambique’s debt issues. First, the obvious risk profile of the projects demanded more due diligence. It remains a mystery why these institutions would advance such significant loans without even ascertaining whether the application followed the country’s national laws.
Second, the lack of rigor in the analysis of project feasibility raises additional questions. It turns out the 24 fishing boats bought under through a deal with EMATUM are currently moored and rusting in the harbor of Maputo. The project is reportedly struggling to take off due to mismanagement and grossly exaggerated projections. In fact, EMATUM’s results published last year pointed to the fleet catching just $450,000 USD worth of tuna per year, compared with the $18 million sales forecast for this stage of the project in the government’s 2013 feasibility study. How could the financiers not question the amusingly optimistic projections?
It also doesn’t help that Andrew Pearse who as a Credit Suisse employee helped structure the EMATUM debt deal and then immediately left the bank to go into business with Lebanese French billionaire Iskandar Safa whose companies, Constructions Mecaniques de Normandie and Adu Dhabi MAR, supplied the boats and military vessels on the EMATUM deal. All of this does raise questions of power and information asymmetry at least on the part of the Mozambican government.
How does this affect ordinary Mozambicans?
The G14‘s suspended budgetary support to Mozambique in the wake of the debt scandal (approximately US $476 million per year) is money that could have improved the nation’s health and education services. Moreover, Mozambique was expected to spend 12.6 percent of government revenue on external debt payments in 2016, compared to a prediction by the IMF of 6.7 percent three years ago. The fresh scandal means a lot more money will be spent paying back uncritical lenders like Credit Suisse and VTB, diverting much needed resources from addressing the issues currently bedeviling the country.
What else can creditors and donors do?
Creditors may never recover their money if key donor countries and the IMF completely shut the door on Mozambique. Isolation has rarely worked in history. It is important to support Mozambique’s non-state actors in this conversation. In fact, donor countries like Switzerland could play a critical role in engaging their private sector on voluntary disclosure of loans to governments, and advancing a more robust monitoring framework of overseas investments in emerging markets like Mozambique. A more practical way of doing this is encouraging more and better interactions between the in-country economic affairs departments of EU member states and civil society to share and act on intelligence of the social impact of donor investments in Mozambique.
The controversial involvement of the French government in the provision of military vessels alongside the fishing boats deal raises questions on whether the French government took heed of Criteria 8 of the EU Code of Conduct on Arms Export, which stipulates that EU member states will take into account whether a proposed export would hamper the sustainable development of the recipient country. In this context, EU member states are to consider the recipient country’s relative levels of military and social expenditure, and any EU or bilateral aid.
International financial institutions, like the IMF, may also need to take this opportunity to improve relations and collaboration with civil society. Oxfam has successfully supported such an engagement among civil society in Ghana, the IMF, and the government. It not only improves country ownership of important conversations like these, but also enhances financiers’ political economy analysis of Mozambique.
Of course, one can’t understate the importance of insisting on contract transparency as a condition for financing future projects and addressing debt. The IMF should insist on full public disclosure of loans on a project-by-project basis, and take punitive measures against government officials who contravene these provisions.
A debt audit could help ascertain whether some of this debt incurred is odious or illegitimate and thus not enforceable. If, as has been arguably established in this case, the banks were uncritical and negligent and Mozambican officials erred by hiding the loans from the public, why should the debt be considered legitimate and thus a burden to the Mozambican people?
The once promising southern African nation is now on the hook for a massive debt that threatens the social, economic and political fabric of the country. And the biggest tragedy is that it could have been avoided.
Editor’s note: A previous version of this posting stated that Mr. Pearse left Credite Suisse “to work for Lebanese French billionaire Iskandar Safa…” We are happy to clarify that Mr. Pearse did not work “for” Mr. Safa but instead went into business “with” Mr. Safa as a co-investor, along with Privinvest, in Palomar. This previous version also stated that Constructions Mecaniques de Normandie and Adu Dhabi MAR, supplied boats and weapons on the EMATUM deal. We are happy to clarify that, by weapons, the author was referring to military vessels.