Alert 67 – Mozambique: Attorney-General releases debt audit report

Mozambique’s Attorney General’s Office (PGR) recently published the executive summary of the report on the independent audit into the country’s undisclosed debt. The initial report was completed and submitted to the PGR on 12 May 2017 for the Attorney General to review. The audit, by international auditing firm, Kroll, looked into the almost US$2 billion in undisclosed debt accrued by three Mozambican parastatals, namely, Ematum, Mozambique Asset Management (MAM) and Proindicus. The revelations of this undisclosed debt in April 2016 resulted in the country’s major aid donors, including the International Monetary Fund (IMF) and international donors, suspending financial and budgetary assistance to the country pending an independent investigation.

This suspension of financial assistance precipitated an economic crisis in Mozambique, marked by a sudden contraction of the national budget, a devaluation of the nation’s currency, and increasing inflation. However, despite the completion of the report, it is unlikely that financial assistance will recommence in the immediate future given Kroll’s findings.

According to the executive summary released by the PGR, at least US$713 million of the US$2 billion debt remains unaccounted for by the three companies. The auditors speculate that the figure could be as high as US$1.2 billion and added that the three companies were uncooperative in the audit and failed to properly account for how the loaned capital was utilised.

Ematum was arguably the most concerning. The national tuna company ostensibly took out a loan of about US$850 million from the two banks, Credit Suisse and VTB, in order to purchase 24 new fishing vessels. Kroll estimates that the cost should not have exceeded US$2 million per vessel, yet it appears that Ematum spent US$22.3 million on each. The company failed to explain the surge in costs.

Further, it appears that at least US$500 million of the undisclosed loans was incorporated into Mozambique’s national budget, an amount the Ministry of Finance seems unable to account for.

The majority of Mozambique’s financial donors appear to be taking the IMF’s lead on whether or not to resume assistance. The IMF, in turn, has welcomed the report’s release, adding that an IMF delegation will travel to Mozambique in mid-July to discuss the findings with the Mozambican government. It is likely that the IMF will want Mozambique to take more concrete actions to address the concerns raised by the report, including forcing the institutions involved to better account for the loaned capital.

The IMF will also likely want to see Mozambique effect better measures to prevent such scenarios recurring. Kroll noted that the process for the state guaranteeing loans is currently inadequate and has left the Mozambican state and taxpayers responsible for loan repayment if parastatals fail to meet payment deadlines. In addition, the Mozambican legislature is supposed to be consulted on all loans of this magnitude, yet the parastatals apparently got the go ahead from the previous administration of president Armando Guebuza, circumventing the legislature’s constitutional mandate.

The report’s findings will also cause political difficulties for Mozambique’s current President Filipe Nyusi, as he will need to act against members of the previous administration for allowing the debt crisis to occur. In addition, the three companies all have strong ties to the country’s influential security services, SISE. It also generally believed that a large amount of the loaned money was siphoned off into defence expenditure in order to purchase weapons to assist Mozambique’s armed forces during the recent civil conflict with Renamo.

If these suspicions are confirmed, Nyusi will find himself at a disadvantage in the peace negotiations as well as have to explain to the Mozambican public how all this occurred during his tenure as Minister of Defence. Accordingly, if some or all of the missing US$713 million is found to have been misappropriated to defence spending, this would implicate Nyusi himself in the secret debt crisis. Thus far he has been placing blame on Guebuza’s administration.

In the short term, Mozambique’s economic woes are expected to continue. It is unlikely that the IMF and international donors will agree to fully restore funding without further government action. The best-case scenario for Mozambique could entail the IMF agreeing to a partial resumption of funding, with the understanding that full budgetary assistance will resume if government continues to investigate the matter and adopt recommendations to improve financial management.