Financial Crime World

Mozambique’s Economic Crisis: The Devastating Impact of Financial Crime

Introduction

Mozambique’s economic growth has been severely impacted by a series of state-backed “hidden loans” that were contracted without parliamentary approval. This article explores the devastating impact of financial crime on Mozambique’s economy and discusses the lessons learned from its experience.

The Crisis Unfolds

Background

In 2013 and 2014, a clique of government officials created three state-owned enterprises (SOEs) that took on over $2 billion of debt, equivalent to around 12% of the country’s GDP. The funds were allegedly used for shipyards, tuna fishing, and coastal policing.

The Discovery of Hidden Debts

The “hidden debts” episode was exposed in 2016 when international media reported on it. This led to a sharp decline in growth, from 7.7% in 2000-2016 to 3.3% in 2016-2019, as well as a drastic depreciation of the metical currency and a surge in inflation.

The Consequences

  • Sharp Decline in Growth: Mozambique’s economic growth declined sharply from 7.7% in 2000-2016 to 3.3% in 2016-2019.
  • Drastic Depreciation of the Metical Currency: The metical currency depreciated drastically, leading to a decrease in purchasing power and an increase in prices.
  • Surge in Inflation: Inflation surged due to the decline in economic growth and the drastic depreciation of the metical currency.

Lessons Learned

Mozambique’s experience highlights several lessons, including:

  • Strengthening Debt Recording and Transparency: The importance of strengthening debt recording and transparency cannot be overstated.
  • Deeper SOE Reforms: Deeper reforms are necessary to ensure that state-owned enterprises operate efficiently and effectively.
  • Calibrating Iterations, Ownership, and Timing: Calibrating iterations, ownership, and timing is crucial for successful implementation of economic policies.

Recovery Efforts

The government of Mozambique has taken significant steps to address the governance weaknesses that led to the crisis. These efforts include:

  • Adopting New Regulations: The country adopted new regulations in 2017 to strengthen debt and guarantees management and transparency.
  • Introducing Fiscal Risk Statements: Fiscal risk statements, including credit risks from SOEs, were introduced.
  • Technical Assistance Program: The World Bank supported Mozambique through a technical assistance program called GEDI, which provided support on debt management and transparency, fiscal risks, and public investment management.

Conclusion

Mozambique’s experience highlights the importance of strengthening debt recording and transparency, deeper SOE reforms, calibrating iterations, ownership, and timing. The country has made significant progress in addressing its governance weaknesses, but there is still much work to be done to restore its economic growth and stability.