With strong growth and associated poverty reduction, Mozambique was a development success story until 2016. For the two decades following the end of the civil war in 1992, gross domestic product (GDP) expanded at an average annual rate of almost 8% (panel a below), making Mozambique one of world’s 10 fastest-growing economies. The expansion boosted incomes and living standards, with GDP per capita growing at an annual average of 4.8% and poverty rate declining from 60.3% in 2002–03 to 48.4% in 2014–15 (panel b below). This success was facilitated by political and macroeconomic stability, which provided the foundation for a rebounding agricultural sector and significant foreign direct investment (FDI). During this period, Mozambique received massive donor support, for which the country gained a reputation of being a “rising star” or a “donor darling”. 

Economic Growth and Poverty Reduction in Mozambique

But things changed in 2016, when the hidden debt crisis plunged Mozambique into a severe economic crisis. A new report from the Independent Evaluation Group tracks the changes in circumstances and the responses to them, as it evaluates the World Bank Group supported program in Mozambique from 2008 to 2021. In 2016, large previously unreported external borrowing came to light while the government was negotiating a restructuring deal for a highly controversial loan taken in 2013 to finance the Mozambique Tuna Company (EMATUM). The undisclosed non-concessional borrowing was equivalent to 10% of GDP ($1.4 billion), contracted by the government between 2009 and 2014 through guarantees to state-controlled companies and direct borrowing from bilateral lenders. Following the revelations, the currency depreciated drastically, inflation surged, fiscal space shrank, average annual growth halved from 7.7% between 2000 and 2016 to 3.3% between 2016 and 2019, and foreign direct investment dried up as investors lost confidence.  

The hidden debt also negatively impacted access to concessional financing with official aid falling from 17.5% to 12.4% of GDP. When the hidden debt was accounted for, Mozambique’s external public and publicly guaranteed debt ballooned from 61% of GDP in 2016 to 104% in 2018. With a precipitous increase in debt service, Mozambique defaulted on its debt in 2016.  

What went wrong? 

Four factors created the perfect storm: (1) state capture by powerful elites, (2) access to abundant non-concessional finance associated with the discovery of large gas deposits, (3) inadequate oversight of state-owned enterprises, (4) and weak public investment and debt management. Neither the World Bank nor the development community anticipated the severe implications of this combination of factors. Before the scandal, the World Bank’s approach to addressing these challenges relied heavily on technical and institutional capacity building with insufficient attention to the underlying political economy and associated corruption risks.  Fiscal risks were largely addressed through reforms and capacity support to produce and publish Medium Term Debt Strategies (MTDS) and debt and fiscal reports. In contrast, a governance lens would have implied greater support to establish ex-ante controls on borrowing and public investment aligned with the country’s Debt Sustainability Analysis (DSA).  

The World Bank had undertaken several public financial and debt management diagnostics but did not use the findings to inform operational or policy reform priorities, including in the series of Bank-supported budget support operations. This was most noteworthy with respect to the finding of the 2008 Debt Management Performance Assessment (DeMPA), which flagged serious shortcomings in debt reporting and recording. 

To some extent, the lack of attention to such systemic shortcomings was the result of inadequate internal coordination and prioritization in World Bank support for public financial and debt management. While the World Bank provided significant support for upstream aspects of debt management (e.g., preparation of debt management strategies), with belated attention to downstream aspects (debt reporting and recording, cost and risk analysis, and debt processes and procedures). Moreover, for most of the evaluation period, support for debt management was not systematically accompanied by efforts to improve public investment management, despite widely recognized synergies among borrowing and the quality of public investment. As a result, there were missed opportunities to enhance the growth and development impact of development spending and debt-financed public investment. 

What have we learned? 

• In contexts characterized by elite capture and corruption, technical solutions to public financial and debt management alone are unlikely to achieve desired results unless governance shortcomings are also confronted. 
• Core diagnostics are essential to inform reform priorities but require deliberate and coordinated follow-up and operationalization across instruments. 
• The quality and impact of World Bank support for public financial and debt management can be enhanced by improving internal World Bank coordination and prioritization. 

Read The World Bank Group in Mozambique, Fiscal Years 2008–21.