The lack of transparency in the management of Mozambique's public finances led the World Bank (WB) to consider Mozambique a "case study", in its World Development Report, where it dedicates several pages also to the Hidden Debts.

The WB acknowledges that these debts reduced the country's financial capacity, leading to significant implications for the ability to service the debt, as it "dramatically increased the amount of interest and amortization due in any given year."

"Specifically, prior to the disclosure of the hidden debts, the market operated on the assumption that 11% of tax revenues would be sufficient to pay 2016 debt service, but with the disclosure of the debts, it became clear that at least 22%, or $600 million, was needed," reads the document quoted by lusa.

In the report, transparency regarding the financial situation of countries is rated as fundamental, and the example of Mozambique serves as a warning as to what can happen to a country that hides state-guaranteed loans from public companies.

"The World Bank and International Monetary Fund (IMF) debt sustainability analysis in 2015 projected that public and government-guaranteed debt in 2016 would be 61% of GDP, but the 2018 paper estimated that debt in 2016 to be 104% of GDP," the paper reads.

At issue are the loans contracted by Mozambican public companies, with the backing of the State, but which were hidden not only from national institutions, but also from the international financial market and international donors and creditors, a case that is currently on trial.

"The increase in debt service in 2017 and 2018 was even larger [than the $600 million forecast for 2016], and was too large for Mozambique's economy, which eventually went into Financial Default ('default') in 2016," BM recalls in the three pages it devotes to the hidden debts case.

According to IMF data, the public debt to GDP ratio rose from 64.3% in 2014 to 120% in 2016 and has continued above 100% since then, and is expected to end this year at 127.6%, the third highest in sub-Saharan Africa after Eritrea and Cape Verde, but in the latter case being mostly concessional debt, which is less worrisome.

The deterioration in the country's fiscal position and rating risk had wide-ranging implications and "transformed a transparency crisis into a comprehensive economic maelstrom that had many characteristics of a systemic crisis," the text points out, which recalls that "the debt crisis was accompanied by a significant depreciation of the local currency from 2014, a rise in inflation, a reduction in fiscal space and a loss of confidence by external investors and the international community, leading to an abrupt cut in the country's rating."

The cut in budget support, decreed by Mozambique's main donors from 2016, continues in some cases until today, as is the case with Portugal, which only funds concrete projects and has stopped donating funds to the budget.

Mozambique, says the World Bank, is only now recovering from the credibility crisis that has undermined not only the ruling party, but also the institutions and the country itself, often held up as a negative example when it comes to financial transparency.

"It was not until 2019 that Mozambique's debt was classified as sustainable given the outlook, motivating sufficient confidence for the World Bank and IMF to provide financing in the wake of Cyclone Idai," the bank recalls, stressing that "an important step in regaining confidence was to improve transparency in debt reporting and debt operations that have since been implemented."

Despite the measures, the three-page case study on Mozambique concludes, the country remains in 'debt distress' as it litigates in court over the validity of state guarantees, and "continues to face unfavorable financing conditions, which imply a higher cost of credit, not only for the government, but also for businesses and households."