JULIE WERNAU and MATTHIEU WIRZ
April 27, 2016 12:37 p.m. ET
The World Bank is suspending direct financial aid to Mozambique, joining the International Monetary Fund in cutting off budgetary assistance after learning of more than $1 billion in previously undisclosed loans, a person familiar with the matter said.The bank will continue to fund individual investment projects, but it is holding back payments of approximately $40 million this year for direct budgetary support, the person said. The World Bank had more than $1.6 billion committed to Mozambique across 23 different projects as of October and was expected to provide approximately $110 million this year for direct budgetary support, $70 million of which has been disbursed.The move is another blow to one of the world’s poorest countries, which relies heavily on international donors that make contributions for food, medicine, schools and other essentials. Mozambique is ranked 180th out of 188 countries in the United Nations Human Development Index, a composite statistic of life expectancy, education and income per capita.“The government can’t pay for education, it can’t pay its hospitals, and it can’t pay for its social issue problems,” said Nigel Morgan,director of Rhula Intelligent Solutions, a Mozambique-based risk management consultancy.
The Wall Street Journal previously reported that Credit Suisse Group AG, Russia’s VTB Group and others had loaned more than $1 billion to Mozambique’s government starting in 2013.
The loans came with a guarantee from the government to lure investors. In 2013, when most of the loans were made, Mozambique’s official budget included $6 million in government-guaranteed debt. Yet the country loaded up with nearly $1.5 billion in government-guaranteed debt, vastly more than its parliament had approved.Following the Journal report, the IMF said it had stopped disbursement of a $55 million loan and had suspended lending, because the country had violated the terms of its agreement by failing to disclose the loans.The IMF approved in December a $283 million rescue loan package for Mozambique. The agreement with the IMF requires the southern African country to fully disclose all borrowings and to meet regularly with the multilateral agency to provide updates on its progress.Donors and other lenders rely heavily on information from the IMF when deciding where and how to give to developing countries such as Mozambique.The IMF said that Mozambican officials have now acknowledged the debt, which the agency called “an important first step toward full restoration of trust and confidence.”With the World Bank also pulling back, Mozambique is getting pinched by both its long-term and immediate sources of aid. The loan disbursements from the IMF are short-term emergency assistance to help shore up its finances. The World Bank’s funding, which includes grant and loan programs that can run for up to 40 years, is for the country’s longer-term development.Before the loans were disclosed, Mozambique’s debt risk profile was considered “moderate” by the IMF. The newly disclosed debt is expected to shift the country’s debt risk to “high.”The person familiar with the discussions between the World Bank and Mozambique said a downgrade would trigger a series of changes to the World Bank’s support in the country, reducing the overall amount of aid to the country and increasing grants as a percentage of aid.The World Bank’s general budget support payments will be on hold until the IMF finishes its analysis, a process that could take months, according to the person familiar with the matter.Lucie Villa, a vice president and senior analyst with Moody’s Investors Service’s sovereign risk group, said the ratings firm is closely following Mozambique’s status in the IMF program because without IMF support, the country’s ability to raise cash from either donors or investors will be limited, fueling liquidity concerns.Top budget donors include Sweden, the European Union, the United Kingdom and the African Development Bank, according to a 2014 breakdown analyzed by Moody’s. Additionally, the World Bank and other donors provide hundreds of millions of dollars in support through low-interest loans and supportive programs. The country’s largest lender in 2014 was China, the document shows.It wasn’t immediately clear whether those donors’ aid programs would be affected. Representatives of these donors didn’t immediately respond to questions posed by the Journal.“We support the IMF’s call for full disclosure of loan transactions and debt to the people of Mozambique. The U.K. follows strict rules and procedures when providing aid. We are considering our response and are working closely with other international partners on the next steps,” the U.K.’s Department of International Development said in a statement.All told, donors account for approximately 30% of the state’s budget, according to Eurasia Group, with approximately 25 billion meticals ($468 million) in grants in the 2016 budget and approximately 32 billion meticals in multilateral and bilateral loans, according to a Moody’s analysis.
—Ian Talley contributed to this article.