Mozambican PGR Seeks Sovereign Debt Accountability

On 29 January, the Attorney General’s Office (PGR) announced that it had filed a case at the Administrative Court to seek “financial accountability of public officials and state-owned companies involved in the signing and management of contracts of financing and goods and services supply,” referring to the $2bn in hidden state-backed loans. The discovery of the undisclosed debts led a group of 14 traditional donors and international institutions, including the IMF, to suspend their programs and direct budget support in May 2016. They have subsequently asserted that their resumption of aid is contingent on making those responsible for the state-backed debts accountable, and on clarifying the whereabouts of the $500mn in missing funds revealed in the Kroll report.

Given that donors previously financed around a quarter of the state budget, President Filipe Nyusi and the government have sought to demonstrate their commitments to tackle corruption and increase transparency and accountability in a still-unsuccessful effort to unfreeze foreign assistance. For instance, the president followed the IMF’s recommendation of hiring an international company to conduct an independent audit, and he dismissed several state officials and public managers. In addition, Nyusi stated that irregularities found by the audit showed potential evidence of criminal practices, and that he would cooperate with the PGR.

In October 2017, in response to growing international scrutiny on the government’s handling of the debt scandal, Prime Minister Carlos Agostinho do Rosario said that the investigation into the hidden debts was the PGR’s responsibility. However, the IMF regarded the PGR’s recent decision to file a case at the Administrative Court as insufficient to resume its aid program. The decision was interpreted as a maneuver to further prolong the investigations, and that the government and Frelimo were trying to transfer the burden of clarification responsibilities away from themselves.

Frelimo is comprised of a few factions whose respective leaders vie to maintain and increase their economic and political influence; many are directly or indirectly implicated in the debt scandal. former President Armando Guebuza was in office when the state guarantees were granted, and Nyusi then headed the Ministry of Defense, an institution that shares the ownership of ProIndicus with the intelligence services (SISE). Considering that the national elite is mostly concentrated in the ruling party, genuine criminal and/or financial accountability for those involved in the debt scandal would necessarily lead to government instability.

In our view, Nyusi is unlikely to bring senior officials to justice, although scapegoats may well be identified in the coming year. The case of the former head of SISE’s economic unit, Antonio Carlos do Rosario, is particularly noteworthy of the government’s balancing act. Dubbed “Individual A” in the Kroll audit, the Guebuza-appointed Rosario is the CEO of the three companies involved in the scandal through SISE’s investment arm (GIPS). According to Mozambican media, he played a key role in establishing the three companies and contracting the faulty loans. However, although his December 2017 dismissal coincided with the arrival of an IMF team to Maputo, it was not followed by a legal investigation.

Nyusi’s move to transfer the investigatory burden into the PGR’s hands means that Attorney General Beatriz Buchili will play a more important role in the near to medium term. Given that the IMF is pressing the government to seek real accountability (beyond administrative proceedings), she will likely be forced to retake the initiative.

How she opts to manage the case will have considerable trickle-down impacts on investors. Effective efforts to seek accountability from past and current senior officials would very likely lead the IMF and other donors to resume aid, but would risk dividing Frelimo ahead of the October 2018 local elections. An eventual agreement with Renamo on the election of provincial governors will likely result in Frelimo losing control over some central and northern provinces, and potentially end its parliamentary majority after the 2019 general elections. This political uncertainty will spill over into the business environment, increasing the risk of the government altering regulatory and tax frameworks as well as individual contracts.

The other route is to stay the course, with limited accountability and continued aid suspension. Although this would ensure party and government stability, it would entail depleted state coffers, which would very likely weaken Nyusi’s hand in negotiations with Renamo. It would also cause a decline in popular support for Frelimo and Nyusi ahead of the 2018 and 2019 elections, although to a lesser degree than in the first scenario, since Frelimo has a well-oiled electoral machine. On the other hand, this option would provide foreign investors with two main opportunities. One would be in terms of predictability and policy stability, and the other would be in strengthening investors’ leverage in negotiations with state institutions, as the government would have an even more urgent need for new sources of revenue. In the coming months, this latter scenario is more likely than any real accountability, in our assessment.