Corruption and state-backed debts in Mozambique: What can external actors do?

The average annual cost of corruption to Mozambique was recently estimated to be up to USD 4.9 billion for the period 2004-2014. Some analysts have entertained the idea that investments in the country's oil and gas sector could reach as high as USD 100 billion over the next decade. Mozambique recently faced a turn for the worse in its balance of payments problems because semi-public entities took out government-backed debts worth over USD 2 billion without fulfilling constitutional and legal requirements.

This U4 issue paper explores the main implications for the effectiveness of anti-corruption policies in the Mozambique case. We ask what external actors can do to alleviate corruption and prevent it from occuring again. 

We encountered credible allegations that a small group of individuals within the Mozambican state violated laws to secure the loans and initially avoided public control mechanisms. Major financial discrepancies exist in terms of the use of the three loans and international development partners and domestic stakeholders suspect some form of corruption. An international firm will implement an independent audit financed by the Swedish government to look into the loans. The audit findings, and investigations by UK and Swiss financial regulatory bodies, will provide a focus for monitoring and evaluation work, possibly leading to criminal and administrative sanctions.

The main policy recommendations are summarised below. Download the pdf to also read the sections on:

1. A literature review of corruption and debt
2. Corruption and state-backed debts in Mozambique

What can be done? Entry-points for external actors

Despite two decades of experience in attempting to address corruption through development aid policy and practice, the best means of tackling various corruption challenges is still contested. Recent meta-studies focused on anti-corruption effectiveness suggest that solutions must fit specific contextual circumstances, and that answers to developing country corruption problems may be both within and outside the countries themselves. With this broad advice in mind, below we consider possible entry-points for external actors interested in pursuing anti-corruption impacts with regard to Mozambique´s current predicament. We divide these entry-points between actions within Mozambique and actions internationally, or in other jurisdictions.

The overall impact of any anti-corruption intervention on Mozambique’s development – including conflict prevention goals - must be the foremost consideration. Although some of the measures mentioned below might be mutually exclusive, our advice is that external actors interested in anti-corruption impacts must think in terms of a range of interrelated interventions and responses to the Mozambican case.

Within Mozambique

Understanding and monitoring the audit's implication and results

An international, independent audit has been agreed and will be implemented following a limited tendering process. Most interviewees recommended rapid publication of the audit’s terms of reference as a means for external stakeholders to verify the details of the agreement between the IMF, the Swedish government (which is financing the audit), and the Government of Mozambique. Without knowing what the audit should achieve, foreign donors and investors, as well as domestic public agencies and civil society groups, will not be in a position to monitor its implementation, or properly evaluate and use its results.

Improving transparency in public financial management with an oil and gas future in mind

Improving transparency for state-backed loans and public financial management are seen as important components of corrective anti-corruption measures in Mozambique. One interviewee noted that given the expected influx of oil and gas revenues over the next decade, time is short for introducing improved public financial management. There is some evidence for the effectiveness of public financial management in tackling corruption and the Mozambican authorities could focus on making the mechanism for procuring state guarantees for public borrowing more transparent. However, there is still a scepticism about its effectiveness, interviewees stated that no law or regulation could have prevented such blatant abuse of power in the recent loans case. International donors could further support measures and initiatives that improve budget, borrowing and public financial responsibility. There is a great need for flexible and adaptive management within international donor agencies that provides capabilities to respond to findings from detailed corruption risk assessments.

Joint donor assessments and responses to corruption and the audit findings 

Joint donor support to iterative processes of corruption risk identification, assessment and management could offer a focus for another strand of interventions from external actors. Disagreements and a lack of coordination among donors are likely to be detrimental. International donors could begin jointly mapping-out various scenarios of the outcome of the audit process and develop proposed responses for each scenario. This will be difficult to accomplish, however, in the absence of a shared donor understanding of the audit’s terms of reference.

Internationally

Sanctioning the banks and reforming domestic financial services rules and regulations 

The national financial regulatory bodies of the UK and Switzerland have begun investigations into the loans in order to determine whether their domestic rules, regulations and laws were broken. Investigations are likely to focus on the due diligence procedures implemented by the banks involved. Interviewees expected the result of the investigation to be sanctioning of the banks alongside recommendations for the improvement of financial services. International donors and both international and Mozambican civil society could play roles in publicizing the results of formal investigations, creating space for policy dialogue on the sustainable development aspects of reforms to financial services rules and regulations in the UK and Switzerland.

Sanctioning corrupt 'politically exposed persons' responsible for the loans

In the field of anti-corruption policy and practice there is interest in the application of ‘non-traditional sanctions’ targeted towards particular corrupt individuals or groups of individuals, including travel and visa bans. This is because traditional sanctions, such as aid suspension, it likely to affect people accessing public services while legal or administrative sanctions may not be feasible due to political barriers. International donors, their domestic law enforcement and ministry of justice counterparts could consider pursuing non-traditional sanctions in the Mozambican case, possibly based on the audit findings.

Pursuing international asset recovery measures based on the Mozambique audit 

Asset recovery involves tracing, freezing, confiscating and returning to the country of origin, funds obtained through illegal means. The UN Convention Against Corruption (UNCAC) enshrined the recovery of stolen assets as a fundamental part of public law. Asset recovery is now viewed as a central component of fighting corruption. However, it usually involves lengthy and politically complex processes. The Mozambique audit could be an initial step in the direction of pursuing international recovery efforts with support from foreign donors. A frequent, and important, consideration with such efforts is whether there are reasons to believe that state looting will simply reoccur. Hence, asset recovery tends to form part of a suite of measures, including sanctions.

Introducing a multilateral body for monitoring odious debts 

The concept of odious debt highlights the lender’s responsibility for considering whether a loan is likely to be used in a responsible manner or not. It has been argued that some loans meet the criteria for odious debt since they were incurred without the consent of the people, have not lead to tangible public benefits and the lenders were aware of these conditions. The Mozambique audit along with the ongoing UK and Swiss financial regulatory investigations could establish whether the loans were odious in character and the degree to which the lenders acted responsibly. It appears that the banks should have checked the legality of the state’s guarantee before finalizing the loans. Declaring the debts as odious would imply that the current Mozambican government would not be liable to repay them. However, this would not need to detract from other efforts to pursue criminal, legal and administrative sanctions against individuals in Mozambique responsible for violating laws and regulations to secure – illegally – state-guarantees for the loans.