IMF wants clarity in public debt

Shocked by revelations that top security officials in Maputo had racked up secret state-backed loans as big as $1.5 billion, the International Monetary Fund has cancelled its emergency loan to the country and its next planned mission to the capital. The secret debt includes a massive Russian loan for a port project in Pemba which was not public until now.These loans appear to have been arranged by the same group of securocrats close to former President Armando Guebuza and the same banks, Credit Suisse and Russia's VTB Bank, that brokered the fmuch-criticised US$850 million Ematum bond, an arms deal unsuccessfully disguised as a fishing operation (AC Vol 56 No 14, The fishing deal got fishier).Firstly, early this month hitherto secret debt of $787 mn., what's left of loans taken out at the same time as the Ematum finance, was revealed, nearly doubling the amount Maputo is known to owe for its opaque maritime security programme. Africa Confidential has since learned that yet more state-backed loans were agreed which could push to $1.5 billion the amount of debt only disclosed this month or yet to come to light.It was only after most of the Ematum bondholders had agreed to restructure the Ematum bond in late March that the additional secret, state-guaranteed loans were revealed. They were issued by Credit Suisse and VTB.

The IMF, which has been talking to the government for months about how to manage the debt and public finances, was shocked to learn of the size of the secret loans. While the government has remained in denial and blocked parliamentary debate on the matter, the IMF today confirmed the existence of more than $1 bn. of undisclosed loans. It will not now disburse – as punishment for having been kept in the dark – the second tranche of the $283 mn. emergency loan it granted Mozambique last December (AC Vol 56 No 24, Nyusi's nightmare). The World Bank and bilateral donors are likely to follow the IMF's lead and freeze their grants and loans in the wake of what some international financial institution sources are calling a 'web of lies' that successive Frente de Libertação de Moçambique (Frelimo) governments have spun around dubious loans that have enriched bankers and government officials at public expense.Credit Suisse and VTB have also attracted strong criticism for over-estimating Mozambique's capacity to repay its loans, and allegedly failing to look deeply enough into how the money was to be spent. Early this month the figure of $787 mn. – $622 mn. of it a loan from Credit Suisse to a state-owned defence company called Proindicus – was given for hitherto hidden loans by the Wall Street Journal. The $622 mn., we understand, includes the $372 mn. loan to Proindicus from Credit Suisse agreed for a maritime security programme in February 2013 (AC Vol 56 No 15). In response to the story, the governor of the Bank of Mozambique, Ernesto Gove, denied all knowledge of the additional loans and said he had never heard of Proindicus. However, Maputo confirmed the details in private to the IMF this week in Washington, the IMF said.

The Mozambique government repeatedly denied that Proindicus received loans additional to the Ematum bond, allowing donors and IFIs to assume that Proindicus was merely a subsidiary element of the Ematum deal. They had no idea until this month that Proindicus, in its own right, had incurred even more debt than Ematum. The false apprehension was encouraged by the fact that both companies share as chief executive , a senior official of the Mozambican intelligence service .

But the Prodindicus loan, we have learned, is even larger than the $622 mn. from Credit Suisse so far revealed. Investors were approached in 2014 with a view to increasing that loan to at least $900 mn., as the Wall Street Journal reported. AC has managed to confirm, however, that they went ahead, topping up the loan to at least $950 mn. with credit from VTB, according to a source close to the Russian bank. VTB has made several off-budget, sovereign-guaranteed loans to Mozambique since 2013, said a source present at a creditors' meeting in London last year.What is certain to anger creditors and IFIs even further, however, is news of the existence of yet another loan from VTB of around $550 mn., linked to the Pemba Logistics Base project. Pemba, a port in the extreme north of the country, expects to receive enormous infrastructural investment as it develops an expanded westward transport corridor and Liquefied Natural Gas plant to handle the vast offshore gas deposits. It is also the home region of veteran Frelimo officials of Makonde ethnicity.Alberto Chipande and other Cabo Delgado elite members were angered when a major contract by the state oil company's logistics arm, ENH Logistics, was made with a company belonging to Italian billionaire Gabriele Volpi without competitive tender and without involving them, a Frelimo source says (AC Vol 55 No 16,  Contracts galore in the new order). The Pemba Logistics Base $550 mn. loan – with associated benefits to local senior Frelimo cadre – is believed to be Maputo's attempt to appease and compensate Chipande and his circle.If the Proindicus loan is reassessed at $950 mn., adding the Pemba loan makes a total of state-backed loans worth $1.5 bn. that IFIs, creditors and donors had no idea existed until the beginning of this April. Nobody knows how much of it has been spent on procurement, of which there is scant evidence so far, and how much may have been diverted by officials.

The revelation that Mozambique owes far more in dodgy loans than first realised made miserable news for Finance Minister Adriano Maleiane when he came to Washington this week for the IMF bi-annual meetings. He had been playing a game of pass-the-parcel and when it fetched up in his lap, he opened the last wrapper to find a debt bomb. Already clearly out of sorts and oppressed by having to defend the fiscal legacy of the Armando Guebuza administration, which he had little knowledge of, he cut a sorry figure. Many now predict he will have to resign, not least because the ministry continued to conceal the extra debt from the IMF despite having specifically promised not to. He was still denying the existence of the additional loans just hours before the IMF's confirmation.The restructuring of the Ematum debt reduced Mozambique's yearly repayment burden from $200 mn. to an annual interest-only payment of $76.5 mn. and a longer timeframe in which to pay the capital, now due in 2023. However, the Proindicus debt – not part of that restructuring because it was unknown – is reportedly due to be repaid by 2021. The debt is unmanageable, financial experts say. The IMF has been so appalled by the apparent recklessness of the lending policy of the banks, however, that it may possibly smile on Mozambique defaulting on a significant proportion of the debt, we hear.Although Ematum bondholders were generally reportedly happy with their deal, the shock news of the Proindicus debt increases risk massively, and throws the Maputo Treasury's calculations in the air. That so much debt could have been undertaken by Frelimo behind the backs of the Finance Ministry and the central bank is almost as surprising to the new officials of the Nyusi administration as it was to the IMF.Much of the Prodindicus debt might have stayed in the shadows if Standard & Poors's regrading of Mozambique's credit status had not, on 15 March, triggered a clause giving Proindicus bondholders the immediate right to repayment. This obliged the banks to disclose the additional debt to Ematum bondholders. But they convinced most Proindicus investors to waive this right, leaving Mozambique instead with $80 mn. of immediately repayable debt. Instead of disclosing the remaining balance of the Proindicus loan, which totals $787 mn., they initially only disclosed the $80 mn., says a source close to the investors.This manoeuvring has caused serious questions to be asked about the banks' policies and again raised the issue, widely discussed during the 2007-08 credit crunch, of banks making loans on the basis of the commissions they would receive rather than their sustainability. 

There are rumours of some heads in some banks already having rolled.The sovereign guarantee which attracted so many bankers and investors was issued in contravention of Mozambican budget law, public probity law and the Constitution. Some have characterised these loans, all taken out during the Guebuza administration, as 'he and his cronies using the nation as collateral for their pet projects'. The possibility of Guebuza or his Finance Minister Manuel Chang facing the music, however, remain extremely remote.About the only bright spark on the horizon is the possibility of a capital gains tax windfall should Italian state oil company ENI sell part of its stake in the gas projects to US company ExxonMobil. Private government estimates that as much as $800 mn. in tax could be earned are too optimistic, sources in the oil sector say. Even if it were that much it would nothing like enough to fix the financial and fiscal farrago.

The newly-revealed debt exposure of the state holed the national budget below the water-line. The currency is floundering and foreign investment has dropped 75% since last year, with a distinct prospect that donor countries will suspend up to $200 million in annual direct budget support. In addition to the economic woes, donors were already disconcerted by Maputo's efforts to hide or downplay the escalating crisis with Resistência Nacional de Moçambique (Renamo, AC Vol 57 No 6, ).As if to reflect the economic chaos, Mozambique remains in the grip of organised crime. The latest victim in a wave of apparently politically-motivated assassinations is prosecutor Marcelino Vilankulo, who was investigating the kidnapping rings that are believed to involve the police (AC Vol 54 No 23, Alarm over new debts). Vilankulo was gunned down outside his home in Matola on 11 April.President Filipe Nyusi is in a precarious position. His appointment of Julio dos Santos Jane as the new Maputo police chief appears not to have increased public confidence. He is still vainly attempting to assert himself as undisputed leader of Frelimo. Although the disastrous loans are not his or his administration's responsibility, he does not have the clout to go after Guebuza or his allies, political insiders say.  Many see that as the key explanation as to why he has not attempted more vigorously to impose himself or take stern action against his predecessor.

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