Mozambique’s rocky road from grand corruption to a debt settlement offers hope, but the scars of mismanagement run deep.

Financial mismanagement, bribery and corruption tied to Mozambique’s ‘hidden debt’ scandal have tipped the country into fiscal catastrophe. At the same time, an insurgency in the north has killed 4 000 people, displaced 946 000 and caused a humanitarian disaster. Recognising the links between these two crises is fundamental to restoring stability in the country.

In 2016, Mozambique was rocked by a scandal involving secret loans amounting to about US$2-billion – meant for state fishery projects – that were secured with undisclosed government guarantees. The International Monetary Fund (IMF) subsequently withdrew fiscal aid to the country, triggering a sovereign debt default that led to a currency collapse. By 2022, Mozambique’s debt-to-GDP ratio had soared to 101%, signalling an alarming level of indebtedness that the country was unable to manage.

In October 2023, a deal was reached that resolved the dispute over Credit Suisse’s involvement in the loan scandal. The agreement absolves Mozambique of substantial debts owed to Credit Suisse under a tainted loan agreement with the state-owned company ProIndicus.

But the fallout has been massive, surpassing US$11-billion in costs from direct expenditures and payments made, as well as losses from economic slowdown. A 2021 research report shows that this economic devastation has pushed a staggering 1.9-million people into poverty.

Rarely considered though is the scandal’s effect on the violent insurgency led by Ansar al-Sunna and the Islamic State of Mozambique Province that broke out in Cabo Delago in 2017. The roots of the insurgency stem from socio-economic marginalisation, corruption and weak governance, which contribute to perceptions that the central government neglects its northern communities.

A recent United Nations Development Programme (UNDP) report reveals that in sub-Saharan Africa, economic marginalisation, poverty and lack of access to essential services are significant drivers of violent extremism. All of these worsened with Mozambique’s debt scandal. Insurgents capitalise on such situations, exploiting grievances caused by state deficiencies.

High debt burdens often lead to reduced government expenditure on healthcare, social welfare and education. Research reveals that following the hidden debt scandal, there was a significant decrease in government healthcare expenditure. This diminished resource allocation and limited access to necessities eroded citizens’ trust in the state.

There is a clear correlation between Mozambique’s high debt levels and the growth of violent extremism. The insurgency has further destabilised economic conditions, making debt repayment increasingly arduous.

A 2019 UNDP report estimates that between 2007 and 2016, the impact of terrorism on African countries’ gross domestic product, loss of informal economic productivity, increased security expenses, and refugee/displaced persons cost over US$119-billion. A Public Integrity Center study puts the fiscal impact of Mozambique’s conflict at US$1.69-billion between 2018 and 2022.

The interplay between economic instability and terrorism can intensify economic downturns, spur inflation and diminish funding for social support systems and notably in Mozambique, security expenditures. In this vicious cycle, the resulting instability fuels the grievances that contribute to conflict.

Source: Data from IMF and Institute for Economics and Peace

Africa faces a pressing dual challenge as mounting debt crises have dire implications for countries’ economies and human security. Continent-wide, various conflicts, ranging from terrorism to armed clashes and political instability, are exacerbated by economic vulnerabilities. Notable cases are Somalia, Cameroon, Egypt, Kenya and Chad (see table).

While debt doesn’t cause terrorism, it can significantly worsen socio-economic grievances stemming from failing service delivery as government revenues fall. That creates fertile ground for exploitation by extremists.

Studies highlight the relationship between economic vulnerabilities and extremist violence in Mozambique, where problems of corruption and weak security are deeply intertwined. However, despite efforts to draft a holistic strategy for the north, political backing for such an approach is lacking.

A comprehensive strategy to boost northern Mozambique’s resilience was developed in 2021 with World Bank and European Union funding. But the plan that was eventually approved a year later removed all references to the social and economic problems driving the insurgency. This change could explain the lack of donor funding for the strategy’s implementation, which has yet to start.

Tertius Jacobs, lead Mozambique analyst at Focus Group, says relying solely on a military response will fall short. He says initiatives such as the Agency for Integrated Development of the North and the Cabo Delgado Reconstruction Plan are under-resourced. Jacobs notes that the government’s current approach appears to be more of a containment strategy, particularly as the violence expands into neighbouring provinces such as Nampula.

Stability in Mozambique also requires that those accused of corruption be held accountable. ISS Consultant Borges Nhamirre says that, ‘After much pressure from civil society and Western donors, Mozambique initiated multiple judicial processes to hold some of the people involved in the hidden debt scandal accountable. But this effort was selective, leaving out the top leaders.’ Ultimately, a lack of political will has prevented justice from being served.

Poor governance, one could argue, lies at the heart of both Mozambique’s debt crisis and its insecurity. The October agreement reduced some of the country’s financial risk – it’s estimated that the general government debt/GDP ratio will drop to 93.6% by the end of 2024. However, the government's commitment to accountability and transparency, and to tackling the drivers of violent extremism, remains lacking.

The Mozambique case shows that for African countries grappling with debt crises, a comprehensive approach that addresses both economic and security concerns is essential for restoring stability.

Written by Isel Ras, Consultant, ISS & Jana de Kluiver, Research Officer, Africa in the World