‘No surprise’ that Mozambique is to repay its USD726m debt: Expert Comment.  

Following the news that Mozambique has agreed a deal to restructure its $726 million debt, Dr Stephen Connelly and Dr Celine Tan from Warwick Law School, who have been working on African debt relief and human rights with a number of partners, have given media comment.

Dr Connelly says:

“The news that Mozambique has agreed it is liable to repay a USD726m debt to creditors which is technically illegal under its own law sadly comes as no surprise. Many such debt agreements are governed by English law, and English law is very creditor friendly. In particular, it regards states entering into debt agreements as corporations and applies common law principles of company law. This essentially means banks dealing with corporations or states are largely entitled to assume that a borrower has correctly followed its own internal procedures approving a loan and that persons in official positions are duly authorised to sign up to these agreements.

“This is a rule which makes sense with private companies – traders cannot be expected to delve into the technical procedures of a company – but creates injustice when applied to states. We thus find cases of states being bound by allegedly corrupt or incompetent individuals, and lenders being able nevertheless to make the states pay, in this case by handing over the country’s gas reserves.

“This case is not even the worst involving Mozambique. Recently two banks, using their London branches, lent money to Mozambique under a credit facility agreement [not a bond agreement] about which the Mozambique government knew nothing and which it certainly had not authorised. Nevertheless, in the absence of a conspiracy to defraud the banks are able to claim that these officials had the usual authority to bind Mozambique and that the heavily indebted state must pay up, despite having never seen the benefit of the monies lent.

“One is forced to ask whether English law creates a moral hazard in which lenders can act with a degree of naivety and refuse to undertake rigorous due diligence, knowing that English law will protect them?

“One proposed solution is to require all such loans to be publicly registered on signing but before drawdown so that the states and civil society can shine some light into this area. This could be backed by a statutory reversal of the presumption that the state ‘corporation’ has its affairs in order, such that it is for the lender to show it has established all powers and authorities are in place. Where these checks are lacking the loan could be voidable in manner similar to secured loans to UK private companies. Public registration of the loan could then act as a safe harbour.

“My own research shows that we have information on USD4.5bn of such loans from London based banks to African states in the last decade, but given the lack of transparency in the area this is but a small sample. This is part of a trend rising to more than USD20bn of such loans in the last decade from all known sources, again subject the caveat that most loans are not disclosed.”

Dr Tan says:

“This state of affairs is due to the highly problematic nature of sovereign financing and the lack of a universal framework governing the borrowing and lending practices of creditors, official and commercial, to sovereign states, despite many attempts by developing countries to institute this at the international level.

“There is a broader legal and political economy point here which is that developing countries often end up repaying loans that have been procured dubiously because default on these loans would be disastrous for their further access to credit, because there is no international mechanism or principles to restructure debt contracted illegitimately or without due diligence on the part of the creditors. And creditors know this, exploit this and know that official creditors will often come to the rescue where loans sour. If creditors had a sufficient financial incentive to act diligently, they will but currently they do not. I allude to this in a recent paper attached.”