VZCZCXRO3888
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #0748/01 2181521
ZNR UUUUU ZZH
R 051521Z AUG 08
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 9199
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0210
UNCLAS SECTION 01 OF 02 MAPUTO 000748
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: PREL PGOV MZ
SUBJECT: CORRUPTION CONCERNS LEAD SWEDEN AND SWITZERLAND TO
REDUCE DIRECT BUDGET SUPPORT TO MOZAMBIQUE
REF: A. MAPUTO 502
B. MAPUTO 729
1. (SBU) SUMMARY: Recent press reports highlight the
decision of Sweden, a member of 19 donor countries (G19) who
engage in direct budget support, to reduce its untargeted
direct budget support to the Government of Mozambique (GRM)
due to shortcomings in the areas of transparency and good
governance. Switzerland has also reduced its budget support
for similar reasons. This follows a recent visit by an OECD
team studying the potential impact that a major corruption
scandal would have on donor flows to Mozambique. The largest
G19 donor, Britain, plans to maintain current levels of
direct budget support, and is trending with other G19 donors
towards more sector and project-specific funding. If growing
concerns about transparency and governance in Mozambique lead
to a crisis of confidence among major donors, a government
highly dependent on donor financing could find it difficult
to maintain current budget levels. END SUMMARY.
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SWEDEN TO REDUCE DIRECT SUPPORT OF GRM BUDGET
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2. (U) In the July 18 edition of weekly Savana newspaper,
Swedish Ambassador Torvald Akesson explained Sweden's
decision to join Switzerland in reducing direct budget
support to Mozambique due to lack of GRM progress on
transparency and good governance indicators. Since the
amount of the reduction is small, and likely to be overcome
by appreciation of the Euro, Swedish officials were surprised
by the significant press interest generated by their
decision. Sweden is a member of the G19, which directly
supports the GRM annual budget at a level projected to reach
$445.2 million in 2009, up from 2008 levels of $383.8 million.
3. (U) According to a G19 review of the GRM's progress, it
had only achieved 23 of 41 transparency and good governance
targets (6 of 18 governance-specific indicators were not
achieved). While 13 members of the G19 agreed to continue
direct budget support at the same rate, four donors agreed to
increase their support, despite poor GRM performance. The
current leadership of the G19 expresses some concern about a
possible trend among member countries away from untied direct
budget support toward sector and project-specific funding.
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SWISS CONCERNED ABOUT DOMINO EFFECT
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4. (U) The Swiss Ambassador told USAID Director that a
portion of their budget support was directly tied to progress
in governance indicators and the lack of progress in key
indicators therefore triggered a reduction of approximately
$500,000 of their total $8 million assistance portfolio.
While this cut is unlikely to be seen as significant, he
pointed out that building support for direct budget support
is difficult in European capitals and parliaments, and
reductions based on corruption and governance concerns will
make it more difficult. Moreover, once one or two countries
decide to cut assistance based on those concerns, other
countries begin questioning their assistance program, raising
the possibility that other countries will follow suit. He
stressed that while the financial impact of the Swedish and
Swiss reductions is minimal, the larger question of donor
confidence in the GRM should generate significant concern for
Mozambican leaders.
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OECD STUDYING CORRUPTION AND GRM FUNDING
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5. (U) On July 2, Benjamin Dickinson, Unit Manager for
Governance, Peace & Security in the OECD's Policy
Coordination and Development Cooperation Directorate briefed
poloffs on his ongoing research into corruption and good
governance issues in Mozambique. According to Dickinson, the
OECD is studying the impact of any potential major corruption
scandals, and any impact such a scandal would have on donor
support in Mozambique, particularly the G19's direct support
of the GRM's budget.
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BRITAIN SECONDS G19 CONCERNS ON SLOW GRM PACE
---------------------------------------------
6. (U) Britain's international development body, Department
for International Development (DFID), provides the largest
share of G19 direct budget support to the GRM. Some 70
percent or 47 million GBP ($94 million) of DFID's 70 million
MAPUTO 00000748 002 OF 002
GBP ($140 million) annual budget goes to direct GRM support.
In a conversation with poloff, a DFID officer echoed Swedish
and Swiss concerns about the GRM's shortcomings on
transparency and good governance. The current DFID policy
mirrors the majority of G19 members, which is to keep direct
support constant in real terms. Overall budget support as a
percentage of the GRM budget continues to decrease as GRM
revenue performance increases by 0.5 percent per year.
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NOT ALL G19 AID IS DIRECT BUDGET SUPPORT
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7. (U) While the press often reports direct donor support to
the GRM at 50 percent, of this amount, completely untargeted
direct budget support accounts for 25 percent of the total
G19 support, with another 25 percent targeted to specific
sectors, and 50 percent targeted at supporting specific
projects. Swedish and British contacts confirmed that the
G19 is generally moving away from completely untargeted
budget support and towards designated project and
sector-specific funding.
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COMMENT: G19'S WAKE-UP CALL TO GRM UNLIKELY TO HAVE EFFECT
--------------------------------------------- ------
7. (SBU) Though the G19 has raised concerns about corruption
and governance issues in the past, both in public statements
and, more forcefully, with high-level government officials in
private, this is the first time that any G19 donors have
followed through with reductions in their level of direct
budget support. The current G19 leadership is justifiably
concerned that a donor consensus on direct budget support
among its members and support from member capitals may be
undermined by the Swiss and Swedish actions but also see it
as an important signal to the GRM about the importance of
these issues. Commitment to direct budget support is
essentially what binds the G19 together as a group that
carries out policy dialogue with the GRM through an often
complicated process involving a variety of working-level and
high-level joint committees in which process sometimes trumps
content. Swedish and Swiss reduction of direct budget
support is a further expression of G19 frustration that this
process has not made a significant impact on key issues. The
GRM response to concerns about corruption and governance has
been minimal in the past so it remains to be seen if this
will lead to any action in the areas addressed by the G19
indicators. Nonetheless, with donor financing accounting for
50 percent of the total government budget, GRM officials have
reason to be concerned about any potential reduction in
direct budget support.
8. (U) Limited USG democracy and governance funding has
limited post efforts to engage on issues of corruption and
governance, except as part of other sector programs, in an
area where the USG previously played a leadership role. Post
requests for additional resources to focus on corruption and
governance concerns could help restore this leadership
position and build a coordinated program with other key
donors to address fundamental issues which could threaten
Mozambique's process of democratization and political
stability.
Amani