A financial plague on Mozambique

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So Mozambique lied. Debts of some 10% of GDP, hitherto unreported, surfaced recently, likely presaging more. The IMF has suspended its programmed, ordered an audit which will be published, and heralded a debt write down next year. Bondholders, liable to take the hit, are up in arms. The metical has crashed, taking the economy with it. And we have another bout of not-so-sotto-voce “tut tutting” about loose African economic management.

But this version of events utterly misses the point and misleads. To see how, briefly consider some Maputo history, which I witnessed with my own eyes.

Upon Salazar’s demise and Portugal’s Carnation Revolution in 1974, Mozambique was plunged into civil war as the Portuguese fled en mass, almost overnight, in dread of imminent Just Retribution for their particularly vile form of colonialism.

But, as for settlers across Africa, before and after, retribution never came.

Instead, Russians, Cubans, Chinese, the ANC, Renamo-fronted South Africans, naive Frelimos, the odd American and French salesmen (apparently), a storm damaged hippie Green Peace schooner, assorted Eastern Europeans and Scandinavians, the UNDP, and Joseph Hanlon, all descended like a plague of Tetse flies. The Apartheid era’s Lourenço Marques tourists vanished, to be replaced by these shady types skulking in corners of the deteriorated Polana and Cardosa Hotels, and throughout the seedier parts of town.

I last visited Maputo in the midst of all this, to discover that I had a new immediate next-door and largely absentee neighbor: President Robert Mugabe. So I, briefly, kept a weather eye on his chickens and guards, and they on me.

But that Maputo was more than fodder for the pen of a Le Carré or Stoppard, for whom it is always about “us”, with others mentioned, literally, just to add colour.

Because though retribution had not fallen on the deserving Portuguese, it rained down like lava on the hundreds of thousands fleeing Renamo’s rural burning, maiming, murdering terror, crushing them like pawns into wildly ballooning shantytowns. One of those had enveloped Maputo’s Eduardo Mondlane airport, right up to the runway edges, livestock and all, jet aircraft undercarriages passing literally at head height.

Gangs of abandoned or orphaned children, corralled by Fagan-types, scavenged the city all hours. The roads out had just about stayed open, if peppered with pot holes and road-blocks, manned by drunken, smoking, casually menacing teenagers of uncertain allegiance, bowed under the AK-47’s and rounds slung over their shoulders. But by the time I landed that last time, the roads out had shut.

This brief reminder of times past is neither a guilt trip nor a tug at your heartstrings, it is the point: Mozambique has plagues visited upon it. After the sudden post independence vacuum, assorted Socialists, Apartheids, cold war warriors, and wanderers swooped. After the discovery of offshore natural gas in 2012, international financiers and oilmen red in tooth and claw did so, Russian and Swiss bankers having surfaced so far. Both times, ordinary Mozambicans got burned.

So is this recent debt lie really no more than bog-standard African official corruption? Well, that is how the IMF, under its Policy Support Instrument (PSI) for Mozambique from 2010, saw things. Just like its earlier assessments, its 2013 Mozambique Staff Report and Risk Matrix noted that: “excessive borrowing leading to unsustainable external public debt” was a medium risk … and that the right policy response was to “enhance [the] debt management [and] project selection and assessment process[es]”.

But this is the boilerplate IMF line, applicable anywhere, anytime. Might as well advise that the Klondike town sheriff in 1896 – suddenly swamped by every chancer, loser, sheister, and low-life gap-toothed hoodlum in the West – should carry on oiling his rifle and shoeing his pony.

So it was wholly inappropriate for the IMF African Director to assert recently that it was not he but the Mozambican people who been “hoodwinked” by the official debt data and that he could only rely on data the government provided. Not only was IMF advice at the time beside the point, but his excuse now smacks of British cock-tailing disassociation from the civil war; just as you’d expect, IMF missions routinely conduct thorough data checks, and unreported official borrowings of 10% of GDP or more will show up in macro data somewhere (tax revenue, inflation, errors and omissions, output, credit and money, own or partner country trade, BIS bank lending data, or all the above), if anyone actually looks.

So what exactly could the IMF have done from 2012 to help Mozambique to deal with the plague, and in that light, what should it do about the matter now?

It could have used its pivotal global status to help address one of the most pernicious fragilities in the international monetary system. As things stand, the advice on debt control to poor countries is “just say no” to malicious private lenders. But for the relevant government officials, having scratched their way into post, being proffered riches beyond their

wildest imaginings, disciplined only by “transparency” (which they also typically control), this self-evidently burdens integrity with more than it can typically handle. With such credits ruthlessly enforced by international courts and institutions, lenders are only too happy to oblige when such opportunity knocks.

Instead, the IMF, in its Mozambique PSI from 2012, could have required the government, as a prior action, to pass a resolution in parliament so that no single domestic or foreign debt obligation entered into in the course of the programme by the government or any institution in which the government had holdings would be valid, absent prior endorsement of the individual credit by the IMF, which would base its endorsements only on the macro and total debt commitments in the programme.

By thus removing international legal enforcement for lack of an authorized signatory on behalf of the borrower, the plague of lenders – scurrilous, usurious, and parasitic – would be beaten back.

Of course, the government might simply have refused such a PSI. But it could only have done so on grounds of intent to evade its own programme commitments, in which case it should not have had the IMF endorsement anyway. And inappropriate borrowing would not have been facilitated by such a misplaced IMF endorsement. Such a PSI requirement would not have constituted “undue IMF interference” in national sovereignty because, unlike standard stand-by arrangements (SBAs), under PSIs the government always has the option of private finance.

Of course, all this would still have left Mozambique having to combat the machinations of gas and oilmen. But at least that challenge would not have been aggravated by finance piggy-backing on it. Far better to deal with finance ex ante, rather than tut-grandstanding about it ex post.

An innovation, or too much hassle?

Despite its claim to be a rules-based institution, the IMF is always innovating, as it should. And while this innovation might have been a hassle, it would have helped to address a core weakness in the international financial system arising big time in Mozambique, and set a precedent for PSIs elsewhere.

And it is not too late now. The present course – to penalise private lenders only via a prospective debt write down – overlooks that public lenders also effectively overlooked this debt control problem in Mozambique. So, instead, a pari pasu writedown would not only be fair, but would also stiffen the resolve of public creditors to insist on strengthening Mozambique’s ability to manage the plague of lenders that is still visited upon it, and thus support the proposed prior action in any new programme that the IMF may mount for Mozambique now.

Ordinary Mozambicans would certainly appreciate.

Source: Financial Times/Peter DoyleYukon Services Clearing Agent License Holder

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