Mozambique’s Billion Dollar Debacle

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.

Chinese Loans in Africa

If you read anything about Africa you have probably come across the discussion that surrounds China's economic activities on the continent. It can be a quite divisive topic, though one that isn't really based on a good empirical insights. There simply isn't a lot of good data in the public domain on China's economic impact and decisions in Africa.

The China Africa Research Initiative at John Hopkins University has just made a big step to change this deplorable state of affairs. Long time China in Africa blogger Deborah Brautigam and several of her colleagues took the wraps off a comprehensive database of Chinese loans to development projects in Africa.

There has been a lot of hype around Chinese money flowing into Africa, with some commentators alleging that these kind of loans have been increasing exponentially in recent years. And because loans to infrastructure and resource development projects are the main form of Chinese assistance to African governments, understanding the scale of this phenomenon really matters for understanding China's Africa politics at large.

If you are at all interested in the issue, be sure to check out the full briefing. If you just want a best of, read on.

First of all, we are talking about much less money than some of the hype would want you to believe. From 2000 to 2014, Chinese banks, contractors and government agencies extended $86.9 billion worth of loans to African governments. The largest share of this, $59.6 billion, was contributed by China Eximbank, which leaves the World Bank as the single largest funder of African development. Simply put, Western angst about being overrun by China in Africa are largely unfounded, especially because the growth of Chinese loans to African recipient is linear, not exponential.

China is also targeting its loans pretty narrowly. More than 50 percent of the total was disbursed to just five countries: Angola, Ethiopia, Sudan, Kenya and the DR Congo, with Angola alone receiving 23 percent. Angola also received five of the 22 lines of financing worth $1 billion or more, though all of these were loans at commercial rates to the state-owned oil company Sonangol. Almost all loans to Angola were designed to be paid back in oil.

Roughly two thirds of loans went to Infrastructure or mining projects, with transport and energy taking the lion's share at 48 percent.

From these numbers, it is pretty clear to me that China is playing a pretty rational economic game with respect to its interests in Africa. On the one hand it is investing heavily in natural resources, especially oil. That is understandable, given China's position as the world's workbench and increasing domestic consumption of energy. Because China is pretty flush with foreign currency reserves, providing lines of credit backed by resources is a smart strategy.

On the other hand, China is using its credit to develop export opportunities. Ethiopia doesn't have a lot of oil, but it has made a real push in terms of extending basic transport infrastructure and developing its hydro power generation potential over the last two decades. China happens to have a lot of expertise and very competitive companies in these sectors, because it underwent the same transition a few years earlier.

The Chinese government via its banks and Chinese suppliers are basically providing African governments with the cash they need to pay Chinese companies to build these infrastructure projects. I imagine that in many cases, the money doesn't even leave China but only travels overseas on paper.

I doubt that any Western government would handle things differently under similar circumstances. That doesn't mean, though, that I think this approach is completely unproblematic.

With Sudan, Angola and Ethiopia in the top spots of Chinese loan recipients, it is clear that China doesn't care about the impacts its money has on African domestic politics. The Chinese government isn't specifically seeking out dictatorships to cooperate with (after all, Kenya and Ghana are on top spots as well), it just doesn't care. At all.

There isn't much sense in whining about this, especially when Western governments don't seem to care much as well. A more constructive approach would be to ask how decision making incentives could be shaped differently, to make all governments more interested in the effects of their development assistance/financial assistance on local politics.