August
2017
THE
MOZAMBICAN DEBT CRISIS: ILLEGITIMATE DEBT BACK ON THE INTERNATIONAL
AGENDA
Mozambique’s
debt crisis highlights the lack of an effective mechanism in the current
global governance regime to prevent irresponsible lending and borrowing
or to deal with their consequences.
By
Bodo Ellmers
Mozambique’s default on commercial loans worth US$2 billion has triggered
the latest – and arguably most shocking – African debt crisis in recent
times. While nearly all African countries suffer from low commodity
prices and rising credit costs, the Mozambican case is unusual in
that it reveals how easily the new development finance paradigm, centred
on private capital, can go wrong.
The successful attraction of commercial loans did not
boost Mozambique’s development. They caused a development disaster.
The case also underlines that the current global governance regime
has no effective mechanism in place to prevent irresponsible lending
and borrowing – or to deal with their consequences – and the need
to get rid of a pile of illegitimate debts which will continue to
strangle the Mozambican economy and society until effective action
is taken.
Where did all the money go?
It's still not fully clear what happened to the $2 billion
commercial loans that were organised for Mozambique by the London
branches of private banks Credit Suisse and VTB, but even the tip
of the iceberg looks incredibly dirty. The official purpose of the
loans was to purchase naval equipment and a tuna fishing fleet. The
money never reached Mozambique, because the banks sent it straight
to the contractor – naturally after keeping a significant percentage
in fees and commissions for themselves. Despite the fact that the
borrowers on the Mozambican side were firms registered under private
law – ostensibly controlled by the secret service – the loans received
a government guarantee. However, local watchdogs such as the Mozambique Budget Monitoring Forum question the legality
of this process.
In any case, the approval process side-lined the parliament
and the loans were initially kept off the books, misleading not just
Mozambican citizens but also foreign donors and IMF (International
Monetary Fund) monitoring. The audit report finds that Credit Suisse initially "imposed
a number of 'preceding conditions' that needed to be met before it
would approve the loan financing, including the requirement to
have the loan agreement approved by the Bank of Mozambique and checked
by the Mozambique Administrative Court and that the 'operation' needed
to be reported to the IMF". But these were quietly dropped, perhaps
because it became clear that the profitable deal would not go ahead
without the loan being approved by these bodies.
As to how the money was actually spent, the audit
report finds that goods and services – mainly boats – were overpriced,
that they never became operational, and that the whereabouts of a
substantial share of the money could not be traced at all. As a result, Mozambique has
been left with $2 billion of extra debt, and no benefits to be seen.
Debt crisis by surprise
When the secret loans were unveiled last year and added
to the government accounts, it raised Mozambique’s debt ratio
to an unsustainable level. It also increased the proportion of expensive
commercial debt, and consequently the amount of money that the government
needs to find in order to repay the loans on time. Even if the money
had been spent properly, Mozambique would have faced significant repayment challenges.
The loan sum of $2 billion, disbursed at an annual interest rate of
more than seven percent, is more than half the government’s annual
budget of $3.7 billion. Even without any leakages and irregularities
the loan conditions would drain scarce resources in future years.
A default in 2023, when the largest instalment was due, would have
been almost unavoidable unless Mozambique had managed to rollover
the loan or mobilise substantial additional financial resources from
new natural resource extraction.
Obviously, the fact that some of the money has disappeared
and the rest has been wasted implies that repayment is even less likely
to happen. In early 2017, Mozambique defaulted on all three loans.
Suspension of payments implies that the loans are, for the time being,
no longer a drain on the budget, but the challenge remains of how
legally to get rid of the outstanding debt. And, of course, how to
prevent such cases in future.
A litmus test for the new development finance paradigm
Clarifying this is essential as the Mozambican case could
be a sign of things to come. The Mozambican crisis has tested
the new development finance paradigm and its emphasis on private capital
as key source of financing for development. Crowding in private investment
is the central approach of the “from billions to trillions” approach that the IMF and the six
multilateral development banks are advocating to finance the sustainable
development goals. The World Bank has recently released a so-called
‘cascade model’ that puts attracting private investments first. The
mobilisation of private finance is also central to the new European
Consensus on Development and the European External Investment Plan.
Mozambique, a country that for decades featured on the
list of the world’s most aid-dependent countries, successfully managed
to attract private capital from creditors such as Credit Suisse and
VTB. Thus it complemented the scarce Official Development Assistance
(ODA) resources it receives with substantial amounts of commercial
loans at market rates. Logically, everyone from Washington to Brussels
should cheer.
The result has been a disaster – no demonstrable additional
development impact, a debt crisis caused by commercial loans and an
accompanying macroeconomic and public finance debacle. Credit rating
agencies have downgraded their ratings for Mozambique, making future
borrowing more expensive for the government as well as subordinated
private borrowers. The IMF is developing a new adjustment programme
that is likely to further reduce Mozambique’s fiscal space to invest
in areas relevant for achieving the Sustainable Development Goals.
Official donors have temporarily suspended aid payments and
particularly budget support, which are essential for sustaining public
service provision. Rather than supplementing ODA, the commercial loans
that Mozambique took out will, due to the inherent repayment conditions,
absorb future aid payments. Thus, European aid will become a revenue
stream for the benefit of Credit Suisse’s and VTB’s wealthy clients.
The Mozambican government may in the future be forced to use ODA to
finance the debts when creditors sue for full payment. Unless, of
course, the illegitimate debts can be cancelled.
Illegitimate debts must be cancelled, fully and finally
The debt was contracted in stark violation of international
standards such as the UNCTAD Principles on Responsible Lending and Borrowing. Unfortunately,
the UK government (the loans are formally under English law), along
with other European governments, have thus far failed to translate
these principles into codified law, which makes the outcome of any
related lawsuits highly unpredictable at this stage.
These same governments also sabotaged attempts to create
a multilateral debt workout mechanism
at the United Nations which would take illegitimacy criteria
into account, as CSOs have advocated for for decades. As a result,
the burden is likely to fall on the Mozambican citizens, not to mention
taxpayers in Europe and elsewhere who fund public aid budgets - while
dodgy investors celebrate with a big aid-funded party. In future,
our European governments must do better when it comes to putting essential
institutions in place. Until then, these and other illegitimate loans
must be cancelled. – Third World Network Features.
-ends-
About the author: Bodo Ellmers works on debt, financial governance
and responsible financing at Eurodad.
The
above article is reproduced from Eurodad, 18 July 2017.
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