Workers march on May Day Maputo - AIM report
Budget support donors, the World Bank and Japan have all said recently that the Kroll forensic audit of the $2 bn secret debt was insufficient to allow a resumption of direct funding to the government. This suggests the squeeze on government spending will continue for at least another year, which could have an impact on municipal elections in October 2018. The government is already surviving by not paying its bills and through domestic borrowing, and the World Bank in its Mozambique Economic Update issued earlier this month noted that government was recently unable to sell bonds even at an interest rate of 28.3%.
The World Bank has been one of the biggest providers of budget support and in March Bank country representative Mark Lundell said he hoped budget support could be resumed this year. But on 24 July Bank Executive Director Andrew Bvumbe dashed any such hopes. On a visit to Maputo he stressed that budget support could not be resumed without a restructuring of the debt, including the $2 bn secret debt, and agreement on an IMF programme, which in turn requires filling the information gaps left by Kroll. (Savana 28 July, Lusa 25 July)
“The auditors were however denied full cooperation from all institutions (national and international)” noted a report accepted last week by the Group of 14 (G14) budget support donors. “Despite being refused essential information, the summary suggests major misconduct from national and international parties.” The G14 demanded “publication of the full report and additional information to fill the major gaps”, as well as “accountability” and fiscal and governance reforms. (Savana 28 July) So no budget support soon.
Japan has cut off all new lending to Mozambique, Yamashita Chigiru, the representative of the Japanese International Cooperation Agency (JICA), told O Pais (20 July) in Tokyo. He said it was necessary not only to clarity the secret debts, but to ensure that such a situation cannot be repeated; until then, “it is not appropriate to give loans to Mozambique.”
Although the World Bank continues to approve new projects not involving direct funding of the government budget, Japan has stopped all new lending although it will continue with projects already under way.
In a statement 24 July Minister of Economy and Finance, Adriano Maleiane, accepted that there would be no IMF programme this year, but said there was the possibility of a program in 2018.
(O Pais 25 July)
Is the debt illegitimate? Should Mozambique pay?
The Kroll audit underlined that whatever the responsibility of the Mozambicans who took the loans, the lending banks VTB and Credit Suisse should have done (and probably did do) “due diligence” studies which would have shown that the loans violated Mozambican law and constitution, that the companies would be unable to repay, and that the purposes of the loans were dubious. Thus it can be argued that the loans were “illegitimate” and the responsibility of the lenders, VTB and Credit Suisse, and not the Mozambican government.
Donors are divided and this has caused debate within the budget support group. The EU and UK argue that the Mozambican government is liable and should repay. But Switzerland, Sweden, Canada and others argue that Mozambique should declare the debt illegitimate and refuse to pay. Frelimo and the government are also divided, with some fearing that a refusal to pay would point the finger at former President Armando Guebuza and current president (and former defence minister) Filipe Nyusi as being responsible for taking obviously improper loans. The alternative to refusing to pay would be to negotiate to delay repayment for at least a decade.
Civil society is increasingly calling for not paying. The Budget Monitoring Forum (Forum de Monitoria do Orcamento) last week published a paper “Mozambique should not pay the hidden debt” by the editor of this newsletter, Joseph Hanlon. The paper argues that the secret loans are illegitimate loans to private companies, with no liability to the government. Loan guarantees given by the finance minister violated Mozambican law and the constitution. Under the loan contract, any action relating to failure to repay would be taken in English courts. Mozambique has been advised that English courts would not consider the violation of the Mozambican constitution, but this is not true. A March 2017 ruling in the High Court in London said that failure to follow domestic rules by a borrowing state must be considered by an English court. This means that if the lenders brought an action in English courts against the government, the lenders stand a high chance of losing. Therefore they will surely prefer to negotiate a deal with partial repayment, and to try to force the banks which organised the loans, Credit Suisse and VTB, to accept some share of responsibility. (Savana 28 July) The report is available in English here and in Portuguese here. In 1998-2000 Joseph Hanlon was policy officer for the Jubilee 2000 campaign to cancel the unpayable debt of poor countries and has written extensively on illegitimate debt.
“We cannot permit the Mozambican people to be charged with the responsibility of paying with misery, blood and death for debts contracted on their behalf in an illegal and unconstitutional way,” the Catholic Episcopal Commission on Justice and Peace said on 4 July. The statement, signed by the Bishop of Pemba, Luis Fernando Lisboa, also demands that those who contracted the debts should be held responsible for their actions, as should those who obstructed the audit by Kroll. Asked about the statement on 19 July, President Filipe Nyusi in effect told the church to keep out of politics: “I would not like the religion of my country to be confused with politics. … They need to know what is their area of leadership.” (O Pais 20 July)
G14 raises questions
The report on the summary of the Kroll audit which was accepted by the G14 group of budget support donors raises a series of questions. It is unhappy with the summary, which did not include the Terms of Reference (ToR) of the audit, and notes that “the lack of the ToR impedes a proper evaluation of the report.” It says the full report should be published by the end of September, but points to the “major gaps” in information.
The points in the Kroll summary it highlights include the lack of any viability or value for money assessments and high fees of “about 10% of the total loan”. It notes “Kroll concludes a potential overcharging of approximately 55% of the net proceeds of Ematum and Proindicus” noting that “for MAM, Kroll was unable to evaluate potential overpricing.” Thus overpricing could be as much as $1.2 bn of the $2 bn loan. No one has been able to identify the use for the $500 mn eventually put on the state budget from the Ematum loan. Little of the money entered Mozambique which means the majority of transactions were made outside the country and thus outside purchasing and financial management systems. And it stresses that “there are accountability issues that stretch beyond the borders of Mozambique.”
By Joseph HanlonSource: News, Reports & Clippings
Negative inflation in July