Can Mozambique declare the $2 billion secret debts illegal?

In recent weeks there have been several arrests in Mozambique connected to the $2 billion secret loan scandal. This could indicate that the Mozambique government is now more willing to take strong action against those involved and declare the debts illegal.

Mozambique is already in default on the debts and no creditor has sued for payment in the last two years since the default began.

One question which has been raised in Mozambique is whether declaring the debts illegal and refusing to pay would make it harder to get access again to IMF loans and donor aid? The answer is it should make it easier.

Normally, the IMF can lend to a government which is in default on debts to the private sector, so long as the government is conducting negotiations in good faith to restructure the debt. However, the IMF has a policy that it can ignore disputed claims. This comes from a paper agreed by the IMF’s Board in 1984 which states “in situations where a debtor disputes the validity of an external financial obligation … the Fund has taken the view that a member’s representation that the debtor disputes the validity of an obligation should be taken as being made bona fide and accepted on that basis.”

Therefore, if the Mozambique government were to declare it disputes that it owes the $2 billion debt, this would be no barrier to a new IMF loan and thus donor aid.

Furthermore, the IMF also has a policy that it cannot lend if a government’s debt will not be made sustainable over the course of a lending programme. The IMF has already declared that Mozambique’s debt is unsustainable. Declaring the $2 billion debt illegal would be the easiest way to restore debt sustainability.

Of course, there are other actions that the IMF and donors are likely to want to see, such as full release of information to the Kroll audit into the debts. In 2017 Mozambique civil society organisations, supported by international organisations, listed the actions they would like to see take place before new IMF loans are given.

But declaring the debts illegal would not be a barrier to IMF loans and donor aid, and should actually help.

If Mozambique declared the debt illegal, then it would be up to creditors to decide whether to launch a legal case against Mozambique in the UK. This is something they have refused to do for the last two years. Legal advice suggests that Mozambique would probably win such a case.

Water pump in Chinhagore, Mozambique. Credit: Senorhorst Jahnsen
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