Drought compounds the misery: in the southern half of the country some 1.5m people are hungry after rains failed for the second year in a row. And weak oil and gas prices have slowed the development of reserves in the north that many had hoped would provide huge dollops of cash to pay off the country’s debts. Instead, investors are running scared. Government bonds are trading at about 70% of face value. This week Moody’s, a ratings agency, downgraded the country, saying it was very near to defaulting.

At the heart of Mozambique’s debt crisis is a series of three foreign-currency loans that, between them, add up to about 15% of GDP. The first was for $850m that was meant to have been spent on a fishing fleet. Yet it seems to have bought ludicrously expensive boats, and a chunk went on high-speed patrol craft. The fishing boats that did arrive generally spend their days tied up on the docks, though occasionally one is seen puttering about inside the harbour. Earlier this year Empresa Moçambicana de Atum (EMATUM), the state-owned tuna-fishing company, said it could not repay its debt. A rescue plan was cobbled together under which investors swapped their EMATUM bonds for ones issued by the government.

That ought to have settled the matter. But just as the swap was going through it was revealed that Mozambique had secretly borrowed another $1.4 billion, or about 10% of its GDP, making it the most indebted country in sub-Saharan Africa (see chart). The revelation shocked the IMF and western donors into freezing disbursements to the government, whose budget relies on international aid. It also led to red faces at Credit Suisse and VTB, the two banks that helped arrange the various bond sales. Some of the investors who bought the bonds complain that the banks should have given them more information.

Yet it seems to have induced almost no shame in the government. The IMF and western donors are pressing for an independent audit of the secret loans. Yet Filipe Nyusi, Mozambique’s president, is dragging his feet, prompting speculation that a cover-up is under way.

Mozambique is not alone in its fiscal fishiness. Economic crisis is stalking Angola, which is also suffering from the slumping price of oil, its main export. Its bonds tumbled earlier this month after Jose Eduardo dos Santos, its president since 1979, said the country was collecting barely enough revenue to service its debt. It, too, had been in bail-out talks with the IMF, but called them off after seeing the fund’s conditions on fighting corruption.

Source: http://www.economist.com