Nurses and teachers are among those bearing the brunt of a debt crisis rooted in the mistaken belief that major gas reserves would bring untold riches
Mozambique’s £1.6bn borrowing spree has caused a fiscal crisis that
means interest on loans, civil service new year bonuses and other
government bills was not paid this month.
Four years ago, with one of Africa’s largest natural gas reserves in development
and visions of fabulous wealth before them, Mozambique’s leaders took
secret loans worth $2bn. These were organised by the London offices of
two major European banks, Credit Suisse and the Russian state-owned bank
VTB, the conduct of whom was sufficiently questionable that they are
now being investigated by financial authorities in the UK, Switzerland
and the US.
The money was for tuna fishing, maritime security and weapons to fight Renamo rebels; according to Christine Lagarde, director general of the International Monetary Fund (IMF), some if it was also used corruptly.
But gas prices collapsed and the development of the gas fields was
delayed. Last year, when it became obvious there was no money to pay,
the loan package became public.
In keeping the loans secret, the government lied to its own parliament, as well as to the IMF and donors (including Britain), who immediately reduced aid and lending. That exacerbated the economic crisis, forcing an austerity programme.
There was a huge devaluation of the local currency, the metical, and
two weeks ago it was announced that inflation last year was 25%. The
austerity package means the government is delaying payments to its
suppliers; last week, it announced it would not make any interest payments on the debt.
Civil servants, including teachers and nurses, who normally receive a
month’s salary as a new year bonus, found the extra money halved. The
secret loans are now being investigated by forensic auditors
Kroll, who are due to report in May. But the domestic fiscal crisis
will continue for many months, and government has already said no
payments will be made on the loans this year.
Details of the loans remain secret, but a Mozambican parliamentary investigation reported last month. Combined with press leaks, a grim picture is painted.
Feasibility studies used to justify the loans were ridiculous, assuming Mozambique
could sell tuna for four times as much as nearby Seychelles, for
example, or that huge multinational companies would hire an untried
Mozambican security company to protect the offshore gas wells.
The loans were made to three private companies, largely owned by the
Mozambican security services, Sise. Finance minister Manuel Chang said
the state would guarantee to repay the loans. But the parliamentary
commission concluded that Chang’s guarantees were unconstitutional,
illegal and invalid – and that this should have been obvious because
only parliament can guarantee loans.
In Mozambique fingers are pointed at former President Armando Guebuza
and a small group around him, as well as Chang and Sise. But in London
questions are increasingly being asked about Credit Suisse
and VTB. They did not lend the money themselves, but they sold bonds
and pieces of the loans to investment funds and other lenders. What did
they tell those lenders?
On large loans like this, banks normally do what is called a “due
diligence” study, looking at the viability of the loan and the borrower.
Even the most cursory study would have shown that the state guarantee
signed by Chang was not valid, and that the feasibility studies and
repayment plans were nonsense. Furthermore, by keeping the loans secret,
the banks did not reveal to the bond and loan holders that the $2bn
loan package pushed Mozambique’s debt to unsustainable levels, making repayment highly unlikely.
Credit Suisse and VTB have passed on all the risk to other lenders
and made their profits from commissions, so they do not care what
happens now. But global banks have a fiduciary responsibility; in this
case to the borrowing country, the bank must check that the loan is
sensible and not excessively corrupt, and for the investment funds who
take on the loans, the bank must check that the borrower is likely to
repay. A due diligence study should have shown that neither was likely,
and thus the loan was highly dubious.
This is like lending to a gambler who says, “I am broke but will
surely win next time.” When a loan is made ignoring obvious evidence
that it is unwise, the loan is called “illegitimate” and is the
liability of the lender, not the borrower.
Mozambicans and lenders alike are angry. Complaints that the secret
$2bn Mozambique loans are illegitimate are growing. The supposed
government guarantees were obviously invalid from the start and
Mozambique cannot and should not pay. Thus Credit Suisse and VTB may be
forced to take responsibility for the loans. theguardian
• Joseph Hanlon is a visiting senior
fellow in the international development department at the London School
of Economics, and a visiting research fellow at the Open University