Moçambique on-line

English version of an article published in
metical nº 1075 - September 19, 2001

Killing the goose that laid the golden eggs (Part 2)
Banking after Samora

In 1986, war and donor pressure forced the government to liberalise the economy. In April 1986 Abdul Magid Osman became finance minister and Eneas da Conceição Comiche became governor of Banco de Moçambique (BdM). On 19 October 1986, Samora Machel was killed. On 14 January 1987 Mozambique introduced the PRE (Programa da Reabilitação Económica). Abdul Magid Osman said in 1990 that "Mozambique needs an elite of entrepreneurs". And the old socialist elite believed they should have help to become the new capitalist elite.

PRE meant a shift to more traditional banking. In 1987 the government recognised 34% of the BdM portfolio - Mt 40.6 bn (then about $160 mn) - as bad loans of public enterprises. But the ongoing war meant that bank credit remained important to keep enterprises functioning. José Miguel Sequeira Braga, an administrator of Banco Popular de Desenvolvimento (BPD) until he retired in 1995, said "the government instructed that capital be injected into these companies to permit them to continue to function and prevent the dismissal of tens of thousands of workers." Half of BPD loans would not be repaid, but Braga noted that "banks in Europe after the Second World War were in as bad shape, or even worse."

Any country - socialist or capitalist - supports its preferred entrepreneurs. In a centrally planned state, it was correct and proper to give money as directed by the plan. During the war, it was essential to use the banks' money to keep the economy running. In a hierarchic country like Mozambique, any bank official will follow the instructions of the President. And in the new free market economy, the banking system was essential to promote Mozambican business. All of this led to loans which could not be repaid, yet it was not "corrupt."

But the transition to the market economy led to increasingly questionable practices. In 1988 the Caixa de Crédito Agrario e de Desenvolvimento Rural (CCADR; Agricultural Credit and Rural Development Fund) used donor counterpart funds to give "loans" to military men and Frelimo party officials, with no intention that the loans should be repaid. CCADR was managed by BPD.

Privatisation had begun; banks lent money to Mozambican entrepreneurs to buy and rehabilitate state companies - and to have the cars and foreign travel the new elite demanded. Finance Minister Magid Osman in 1990 warned of "the current tendency towards the creation of a class based on dubious business deals, and that requires various 'bonuses' and protection from the state." Bank officials began approving loans in exchange for a 10% commission, knowing that the loans would not be repaid.

Even by 1986 there was significant corruption in the military, while traders who had accumulated wealth during the candonga days were becoming increasingly open and powerful. A few senior BdM officials were corrupted and began assisting Asian-origin trading families in their illegal foreign exchange dealings. Traders were seen openly going to the house of a BdM official with bundles of Rand.

Better record-keeping would have picked up some of the misconduct, but improvements were consistently blocked by people inside the banks who wanted the old systems as cover.

With the "turn toward the West", aid doubled from $359 mn in 1985 to $710 mn in 1987. There was corruption at high levels in ministries and state secretariats. By the early 1990s, at least two senior figures had foreign bank accounts with more than $3 mn. By the late 1980s there were already reports of people close to the presidency using aid money for personal accumulation. Senior bankers told us of telephone calls from people close to the President instructing that loans be given to certain companies or cash be given to individuals.

The World Bank's 1989 Small and Medium Enterprise Development Project lent $32.6 mn though BdM, BCM, and BPD. The World Bank's own evaluator, Luis Landau, wrote in 1998 that 90% of these loans would never be repaid. He went on to say that "the [World] Bank is alleged to have put substantial pressure on the management of the banks to ensure the expedient disbursement of projects funds; this undermined even further the credit quality of the sub-loans." In other words, World Bank pressure encouraged corrupt lending.

The World Bank Industrial Enterprise Restructuring Project was similar and lent about $29 mn to privatised state companies. Few loans were made until 1995, and the grace period, before loan repayments start, is 5-7 years, so it is not yet possible to know if these loans will be repaid. But with the loans now starting to come due, this may account for some of the additional bad debt provisions demanded for BCM and Banco Austral.

In an interview on 13 July 2001, World Bank Resident Representative James Coates said that the World Bank has no list of who the World Bank money was lent to. He said this was left entirely to BdM, which is responsible for repaying the World Bank and which probably does have a list.

Carlos Cardoso wrote that public opinion saw BPD and BCM as "a slush fund" (saco azul) for senior government officials and the Frelimo party, and he noted the common belief that the banks financed the Frelimo campaign in the 1994 elections.
(Joseph Hanlon)

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