jhroapedoc - Review of African Political Economy No

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jhroapedoc - Review of African Political Economy No

Review of African Political Economy No.91:53-72

    ? ROAPE Publications Ltd., 2002

    ISSN 0305-6244

    Bank Corruption Becomes Site of

    Struggle in Mozambique

    Joseph Hanlon

    Three people have been murdered for investigating corruption in the Mozambican banking system and the loss of more than $400 million. All countries use banks politically, and in Mozambique, the banks were first used to build socialism, then to keep the country running during the war, and finally in the new capitalist era to promote local entrepreneurs and keep the economy out of foreign hands. But the nature of socialist banking and the process of transition combined to create the conditions under which powerful individuals could use the banking system for accumulation. But this has been contested, and there is an ongoing struggle within the elite between those groups which back what Peter Evans calls the ‘predatory’ and ‘developmental’ states. The recent murders suggest this contest is becoming more acute. Finally, we note that a key role has been played by the international financial institutions, which in their doctrinaire opposition to any serious role for the state chose to back the predatory state faction.

    From Socialist Banking to War Economy to Capitalism

    At independence, the Bank of Mozambique (Banco de Moçambique, BdM) was created as the new central bank on 17 May 1975 by simply transforming the Banco Nacional Ultramarino. But the new Frelimo government did not give priority to the banking sector, and it was more than two years before any further action was taken. With growing evidence that the private banks were hostile to the new government and were facilitating capital flight, particularly by Portuguese who had left the country, the government finally nationalised all but one of the remaining banks on 31 December 1977 (Wuyts, 1986:172). Four banks were merged into BdM and two were merged to form the People’s Development Bank (Banco Popular de Desenvolvimento, BPD); only Banco Standard Totta de Moçambique (BSTM) remained private. The BdM became the only bank that could deal in foreign exchange on 1 September 1978. It was the treasury, central bank, the controller of the execution of the state plan, and a commercial bank. BPD was a credit institution taking small deposits and specialising in agricultural credit.

    In part, the slow movement on the banks was because Frelimo followed the Soviet view that in a socialist centrally planned economy, material balances become the principal method of allocating resources and money loses its importance. The state budget financed capital expenditure, while the banking system financed circulating capital. In the first years of independence, the priority was to keep production going and not dismiss workers, despite the flight of Portuguese managers and technicians; state-controlled banks were instructed to finance the deficits of these enterprises to keep them running. Marc Wuyts (Wuyts, 1986:171) comments that despite being inflationary, it

    was the most direct and effective instrument in the combat against economic sabotage. Far from being a destabilising factor, this policy was crucial in stabilising employment, preventing a further collapse in production, and preserving stable prices.

    With the intensification of the cold war, South Africa in 1981 launched its war of destabilisation and

    over the next decade, caused damage of more than $20 billion and 1 million deaths (Hanlon, 1996:15). The government printed money to finance the war and again banks were lending to cover enterprise deficits, in this case increasingly caused by the war. The amount of internal credit doubled between 1981 and 1984, mainly due to the need to reschedule debts of enterprises with persistent deficits (Wuyts, 1986:70, 96, 160, 172, 193).

    However, the failure to transform the state sector of the economy and its interaction with the rest of the economy led to a separation between official and parallel economies, with the peasantry located in the parallel economy. Money supply grew, and surplus money migrated into the parallel economy, and quickly moved into the hands of speculators and of a growing private commercial capital (Wuyts, 1986:9, 215, 257). Prakash Ratilal, then governor of BdM, told parliament ‘each month the stock of money in the hands of the public increases without there being any outlet for it.’ This, in turn, created

    social instability, he said (Notícias, 25 Mar 1983).

    The year of dramatic change was 1986. Faced with a worsening war and intense pressure from the West and donors, the government moved to liberalise the economy and increase the role of private business, in particular trying to control the money supply by raising prices and by allowing more private investment. In April 1986 Abdul Magid Osman became finance minister and Eneas da Conceição Comiche became governor of BdM (he had been President of BPD since 1978 and vice-minister of Finance 1984-86). On 19 October 1986, Samora Machel was killed. On 14 January 1987 Mozambique introduced the Economic Rehabilitation Programme (Programa da Reabilitação Económica, PRE), which devalued the local currency (the metical), raised prices, and allowed workers to be laid off. Bank credit regulations were tightened and credit was to be directed more to importing raw materials, and less to covering on-going deficits. In 1987 the government recognised 34% of the BdM portfolio then

    about $160mn as bad loans of public enterprises. Of this, $40mn was rescheduled and $35mn actually paid off by the government. Government recognised 78% of BPD’s portfolio – $80mn as bad debts and

    rescheduled or paid off most of that (World Bank, 1990:104).

    Although there was an attempt in the PRE to move to more traditional banking, the ongoing war meant that bank credit remained important to keep cooperatives, state companies and even quite large private companies functioning. José Miguel Sequeira Braga, a BPD administrator until he retired in 1995, noted that the ‘poor economic and financial situation of nearly all companies during the war resulted in an accumulation of debts to the bank.’ Furthermore, ‘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.’ But Braga added that although perhaps half of BPD loans would not be repaid, ‘banks in Europe after the Second World War were in as bad shape, or even worse’ (MediaFax, 5

    February 1997).

    And in the new free market economy, money from the banking system was essential to promote Mozambican business and to prevent a complete foreign take-over and re-colonisation. Finance Minister Abdul Magid Osman said that ‘Mozambique needs an elite of entrepreneurs who feel that society values their importance. … In my opinion, the creation of a large, dynamic and enterprising Mozambican entrepreneurial class is essential’ (Hanlon, 1991:224). There was a widespread view of the old socialist elite that they should have help to become the new capitalist elite. Honour, Corruption, Development & Predation

    Nothing we have discussed so far is in any way ‘corrupt’. In a socialist, 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. Any country – socialist, capitalist or mixed supports its

    preferred entrepreneurs, whether they are big state companies, cooperatives, private companies, or individuals. This normally involves regulatory preferences, priority access to state resources, and access to credit and the banks. Thus it was obvious that the state and the banking system would give easy credit to the new private businesses. And the existing banking system, which was accustomed to propping up state enterprises and co-ops, switched smoothly into propping up the new private

business people.

    There has been extensive discussion of corruption in this journal (Szeftel, 2000a; 2000b) and we take Morris Szeftel’s definition that corruption is ‘the misuse of public office, public resources or public responsibility for private personal or group gain’ (Szeftel, 2000b:427). Much of the rest of this article discusses corruption in the banking system. But in this section we need to make a number of preliminary points.

    First, we argue that the socialist and wartime banking system created the conditions which made later corruption easy. In the early years of independence, Mozambique showed an incredible degree of integrity, honesty and even puritanism (Hanlon, 1991:230-2). Because Frelimo did not give a high priority to the banking system, proper systems were never created and procedures remained irregular. So long as it was according to the plan, company deficits were covered by loans which were never expected to be repaid. The overlap between the treasury and the banking system was total when

    Samora Machel was travelling, someone from the presidency would simply phone BdM or BPD and ask for thousands of dollars, in cash, for the delegation. In a highly authoritarian country, any bank official will follow the instructions of the president. The system may have been irregular, but it was not corrupt, and it worked because of the honesty, integrity, and good will of the people in the banking system. But that left a system dependent on individuals, with few regulatory systems and controls in place. By the end of the Samora era, extravagance was creeping in, as presidential delegations going abroad took more money from the banks for shopping on foreign trips. With no rules, no one in the banking system could say no. That created fertile ground for the corruption that came later. Second, we argue that the growth in corruption after 1986 was intimately linked to the process and model of economic ‘reform’ imposed on Mozambique by the Bretton Woods institutions and the international donor community. Szeftel (2000b:429) notes that ‘far from arresting the upward spiral of

    corruption, the economic liberalisation and attendant governance reforms imposed by the donors have sometimes intensified it beyond anything the government can manage or control’ and that ‘increasing

    levels of corruption and criminality are often the consequence of crisis and restructuring rather than their

    cause’. We will argue that exactly this occurred in Mozambique, in several interrelated ways. Szeftel argues that ‘the legacy of imperialism excludes the indigenous petty bourgeoisie from entry into the

    most advanced or capital-intensive sectors of the local economy, confining it to peripheral activities.’ Accumulation is dependent on access to the state and its resources, and it is ‘unlikely that the market

    forces which had produced underdevelopment and exclusion would mysteriously reverse themselves once independence was attained.’ (Szeftel, 2000a:301; 2000b:427, 431) The result of this, in Mozambique and other countries, was that the new capitalist state continued to direct resources to its preferred entrepreneurs, to try to keep some domestically controlled economy. In Mozambique, privatisation was particularly opaque, and the government tried to keep at least medium-size companies out of the hands of foreign owners.

    The World Bank, which was pushing privatisation, could never allow the state to publicly say it was restricting bidding to Mozambicans, but the Bank was willing to turn a blind eye as long as privatisation accelerated. The effect then was that any efforts to build an indigenous entrepreneurial group had to be done in the shadows which obviously created the conditions for corruption. Szeftel

    (2000a:303) makes two other points which are relevant. First, although corruption in Africa has transferred substantial money to the ruling elite, it has not promoted the development of an autonomous capitalism, and this too, is the case in Mozambique. Second, as reforms and donor pressures reduce the available resources, this actually increases the pressure for corruption and people compete for diminishing resources; this also happened in the Mozambique banking sector. The other issue about World Bank and IMF-driven reform is that its core assumption is that if the state is made smaller and weaker, then there are fewer opportunities for corruption. But the opposite has occurred in Mozambique, both in the privatisation process itself proving a source of corruption, and because the state has reduced capacity for regulating and policing corruption. Riley (2000:139; 1998:135) notes that the World Bank and other donors until recently turned a ‘blind eye’ to corruption in developing countries. We argue that in Mozambique this continues with an implicit agreement that

corruption will be tolerated as long as Mozambique remains the Bank’s star pupil.

    Finally, we turn to the ongoing struggle inside the Mozambican elite. Peter Evans (2000:44-8) writes of the ‘predatory state’ which is characterised by total marketisation, where everything is for sale, including judges. It is based on a patrimonial bureaucratic system, with state power controlled by personally connected individuals. And it tends to disorganise civil society. The ‘developmental state’, he says, ‘foster[s] long-term entrepreneurial perspectives among private elites by increasing incentives to engage in transformative investments and lowering the risks.’ This is not about capitalism versus socialism, but rather between capitalist roads between visions of developmental social democracy

    and of primitive capitalism. Evans also notes that neo-liberalism is not necessarily antithetical to the predatory state. He cites Brazil, where traditional families moved into positions of power and turned modernising projects into support for a traditional oligarchy.

    In this paper, I want to argue that the struggle is between that proponents of the predatory state, placed closely to President Joaquim Chissano, and the proponents of the developmental state, who tend to dominate the Ministry of Finance and the central bank (BdM). The developmental state advocates also include a number of people who played important roles under Samora Machel, and tend to retain from the socialist era a stricter set of ethics.

    Moving to the Market

    The first overt corruption in the banking system started in the late 1980s, when there was significant and quite open illegal trading in foreign exchange. Dollars could be bought and sold at a number of shops in major cities, particularly those run by Asian-origin traders, and the parallel metical to dollar rate was quite widely quoted. A few senior BdM officials were corrupted and began assisting trading families in their illegal foreign exchange dealings. One particular scam took advantage of the dual exchange rate for the Rand maintained by the apartheid government in South Africa; Asian traders were seen openly going to the house of a BdM official with bundles of Rand.

    With the ‘turn toward the West’, aid doubled from $359 million in 1985 to $710 million in 1987 (Hanlon, 1991:61), putting hard currency into the economy but also serving as a basis for corruption. By the early 1990s, at least two senior officials had more than $3 million each in London banks. People close to the President’s office were known in the aid community as corrupt – but donors queued to give them

    money, hoping to curry favour with the presidency. Links to the banking system were direct, with officials in the Presidency telephoning senior officials of the two banks to demand that loans be given to certain companies or cash be given to individuals.

    The transition to the market economy led increasingly to practices within the banking system which may have been politically necessary, but which were in banking terms questionable. In 1988, the government set up the Agricultural and Rural Development Fund (Caixa de Crédito Agrario e de Desenvolvimento Rural, CCADR), which used donor counterpart funds to give ‘loans’ to military men and party officials, with no intention that the loans should ever be repaid. This was an attempt to buy out people opposed to the move to the market economy and attempts to end of the war. As the World Bank (1990:105, 107, 115) commented, the CCADR recognised ‘the need to finance the resettlement of veterans in civilian life in the productive sector (rather than through pensions)’, but it noted ‘that

    CCADR credit had been extended mostly to urban borrowers rather than rural ones, and that it had financed mostly transportation and marketing equipment rather than long-term investment.’ CCADR

    was managed by BPD.

    The World Bank’s 1989 Small and Medium Enterprise Development Project was similar. By 1997, $32.6mn had been lent though BdM (later BCM, see below) and BDP. The World Bank in its subsequent evaluation said that 90% of these loans would never be repaid (Landau, 1998:63). In a 12 October 2000 letter to Carlos Cardoso, editor of Metical, the World Bank Resident Representative James Coates

    claimed that the ‘the World bank was not directly associated with the management of these funds’. But the World Bank’s own evaluation contradicts this. It says ‘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 subloans.’ Evaluation team head Luis

    Landau goes on to note that:

    The implementation of the project was adversely affected by a high staff turnover of [World Bank Washington-based] task managers; this also had a negative impact on the quality of the project (Landau,


     A World Bank Industrial Enterprise Restructuring Project was similar and gave $30 million in loans to privatised state companies, probably never to be repaid. This raises a fundamental question: What message was the World Bank sending to the Mozambican elite when it was putting heavy pressure on banks to make loans that it was obvious would never be repaid? At a crucial time when Mozambican entrepreneurs were just learning how to be capitalists, the World Bank told them loans did not need to be repaid.

    In addition, privatisation had begun and banks lent money to Mozambican entrepreneurs to buy and rehabilitate state companies as well as for cars and other non-productive expenditure and seemed

    not to expect borrowers to repay. BdM and BPD officials began approving loans to people in exchange for a commission, knowing that the loans would not be repaid. Finance Minister Magid Osman in 1990 noted that

    the current tendency is towards the creation of a class based on dubious business deals, and that requires various ‘bonuses’ and protectionism from the state, to the detriment of the consumer (Hanlon, 1991:224).

    Proper record-keeping would have picked up some of these frauds, but both BdM and BPD had inadequate systems. Attempts were made in the late 1980s and early 1990s to computerise and to modernise and upgrade record-keeping, but this was consistently blocked by people inside the banks who wanted the old systems as cover.

    Back to Private Banking

    The early 1990s saw two processes running in parallel an increasing and eventually dominant role for

    the private sector in banking, and the beginning of the struggle between the developmental and predatory state forces. The former tried to curb the worst excesses of the latter, and also tried to create islands of integrity.

    In response to the explosion of illegal foreign exchange dealings, the international financial institutions put pressure on the government, and on 18 September 1990 a decree was issued allowing a free market in foreign currency and allowing individuals and institutions to open foreign currency exchange bureaus. The exchange bureaus were supposed to keep records and file reports with BdM, but in reality there was never any proper control. In 1991 the state monopoly on insurance was ended, and a private insurance company Impar (Companhia de Seguros de Moçambique) was established. Lead shareholders were a Portuguese businessman, António Simões; Inocêncio António Matavel, an important Frelimo-linked businessman; Madal, which Industry Minister António Branco joined after ending his term earlier that year; and BPD. Portuguese investors included Companhia de Seguros Império, which was controlled by Banco Mello and which provided technical support.