The unexpected Mozambican debt crisis: illegitimate debt back on the international agenda

17 August by Bodo Ellmers

Nampula, Mozambique (CC - Flickr - Stig Nygaard)

Mozambique’s default on commercial loans worth US$2bn 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 US$2bn 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 IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
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 Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the money could not be traced at all. As a result, Mozambique has been left with US$2bn 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 US$2bn, disbursed at an annual interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate of more than seven percent, is more than half the government’s annual budget of US$3.7bn. 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 World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
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
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
(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 Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness.  This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security.  Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due.  Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc.  A rating of BB or below is considered a ‘junk bond’ because it is likely to default.  Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness.  The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :
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.

Source: Eurodad



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