I've already linked to a piece about Mozambique's debt scandal in last week's newsletter, but now that the affair is playing out, I think it warrants another look.
Mozambique had to come clean to the IMF last week that it has a higher debt burden than previously known. In total, the government kept loans to the tune of $1.1 billion of the public books, which corresponds to about 8 percent of GDP.
Mozambique had to fess up, because it had to ask its creditors of another, publicly known loan to restructure that debt. Or as Simon Allison writes in the Daily Maverick:
In 2013, Mozambique secured about $850-million from foreign investors to help turn around the struggling tuna industry, even though the revenue forecasts were wildly optimistic. If this sounds fishy – well, it is.
Turns out, most of the money went to the military to pay for six speedboats and three patrol ships, all on order from a French company.
As a consequence, the IMF stopped the disbursement of the second tranche of a $282.9 million loan, because Mozambique's government had agreed to declare all its obligations as part of the deal.
Now the whole affair is becoming really expensive for Mozambique's tax payers really fast. The "Tuna Bond" will be restructured to be paid back at a later date, but at a higher interest rate. Combined with a plummeting exchange rate, this will results in millions of dollars in additional costs. Mozambique has also been downgraded by credit rating agencies, increasing the cost of future loans substantially.
Of course the whole affair begs a few questions. For example, why did the government go on such a borrowing spree and who would lend to a country like Mozambique?
The answer is natural gas. In 2011, Mozambique announced the discovery of major offshore natural gas fields and while it wasn't supposed to come online until 2018, the loans were basically a dividend from the future, from the perspective of Mozambique's policy makers. I mean, what could possibly go wrong?
Turns out, the world economy can go wrong, with oil and gas prices currently hovering at rock bottom prices. This has also pushed back efforts to bring Mozambique's gas to market, likely delaying the timetable until after 2020.
What lessons can be learned from this debacle? First of all, is there a reason why countries like Mozambique, which are heavily dependent on development aid and IMF/World Bank support are even allowed to receive non-public loans? The creditors of the $1.1 billion facility are Credit Suisse and Russia's VTB bank, which could have been obliged by international rules to announce and disclose the deal, shielding Mozambique's tax payers and international institutions like the IMF from the financial fallout.
Institutions like the IMF should also have taken a much more critical stance towards military spending, especially when financed by borrowing against future natural resource rents. That a French company benefited from the sale may have played a role in muting criticism here. But Mozambique has only very limited naval security needs, which would have been fulfilled by a much smaller investment, which should have been transparent and separate from economic development spending.
Lastly, this is another example for why the rights of creditors need to be pared down in international lending. As it stands now, creditors like banks and hedge funds have little to fear, they almost always get paid out in full, to the detriment of the common citizens of the countries they lend to, no matter how obvious the red flags were when they decided to lend their money to a government without any form of reliable income or economic growth strategy.