The Mozambique Hidden Loans Case: Securing Fiscal Legitimacy in developing countries

By Mary Ongore

In 2016, it was revealed that three semi-public entities had illegally taken on debts of over USD 2 billion that were backed by government guarantees. The borrowing companies were Mozambique Asset Management (MAM) (USD 535 million), ProIndicus (USD 622 million), and Empresa Moçambicana de Atum (Ematum) (USD 850 million) which had all been incorporated between 2012 and 2014. All three entities were linked to Mozambique’s state security and intelligence services (SISE) and shared a common CEO, a director of the SISE.

The loans were purported to have been taken in order to establish tuna fishing and maritime security businesses and the lenders were Credit Suisse, VTB Bank, and the European bond market. The basis for such loans was the need for Mozambique to secure assets of oil and gas firms operating in Mozambique waters. The repayment of the debt was meant to be from revenues raised from annual fees oil and gas firms transiting the Mozambique channel would pay for security services. Additionally, revenues from tuna fishing would also assist in the repayment of the loan. No such payments had however been received and the main oil and gas firms in Mozambique had signed no contracts with the semi-public entities. Although future revenues from oil and gas extraction did not act as collateral for the loans, the lenders generally believed that these future revenues would increase the likelihood that these loans would be paid. It is largely believed that these funds were pocketed by politicians and politically exposed persons.

These loans, however, violated paragraph 2 of Article 179 of Mozambique’s Constitution in that they had not been submitted to the National assembly for assessment, approval, and monitoring. They also breached the domestic annual budget appropriation bill which put a top limit on government borrowing.

In 2015, Mozambique approached the IMF for the emergency balance of payments assistance. Following the first disbursement of the IMF loan, during debt restructuring, in 2016 the IMF discovered the loans and suspended general budget support. This move was followed by the World Bank which suspended aid disbursements. G14 donors also suspended general budget support while the US placed its annual aid allocation under review. The country is now deemed to be in public debt distress.

These loans illustrate how illicit financial flows not only flow from developing countries but also allow these flows to return to developing countries. These debts met the description of odious debts as they were illegally gained without the consent of the public and failed to provide any tangible benefit. In 2020, the Mozambique constitutional court ruled that the loans were illegal and unconstitutional and as a result, the government was not obliged to pay them back.

This case illustrates the role constitutional and legal safeguards can be used to protect developing countries from taking on excessive levels of debt. This is mainly achieved by ensuring fiscal legitimacy in debt taking by requiring accountability and transparency in borrowing. It also shows the importance of having widely available published information on debt taken on by both the state as well as its publicly owned entities. The Mozambique ruling also shows that there should be better governance of financial institutions in developed countries to ensure that they do not issue odious debt without following proper procedures and conducting due diligence. Although illicit financial flows move from developing to developed countries, this case shows that developed countries also have a role to play in governing lending institutions in their jurisdictions in order to combat Illicit Financial Flows. The key to tackling this problem is the issue of access to information both by developing and developed countries. Fiscal legitimacy can, therefore, only be attained where citizens of developing countries have access to information. Without cooperation from developed countries, it would be difficult to govern borrowing in developing countries which would allow for corruption and revenue loss that will further plunge developing countries into poverty.

Author: fiscallawafrica

Founding Chair of the Committee on Fiscal Studies, Assoc Prof of Fiscal Law and Policy, University of Nairobi, Kenya. Blogs posted include mine as well as those of other researchers working on fiscal issues in #english, #kiswahili, #french and #arabic.

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