The Mozambican Ministry of Economy and Finance has confirmed that the government will not pay the interest on bonds initially issued by the Mozambican Tuna Company (Ematum) and which is due on Wednesday.

A statement from the Ministry here Monday, addressed to the bondholders, points out that the Minister of Economy and Finance, Adriano Maleiane, made the country’s financial situation clear in a presentation given to creditors in London on Oct 25, and reiterated in a Ministry statement of Nov 14, 2016.

The deteriorating macro-economic and fiscal situation of the Republic has severely affected the country’s public finances. The resulting debt payment capacity of the Republic is therefore extremely limited in 2017, and does not allow the Republic room to make the scheduled interest payment, the statement said.

The Ematum bonds were for 850 million US dollars. They were issued in 2013, via European banks, notably Credit Suisse and VTB of Russia. To this day, there has been no full public disclosure as to what the money was used for.

Certainly the 24 fishing vessels and six patrol boats ordered by Ematum from a shipyard in the French port of Cherbourg were not worth anywhere near 850 million USD. The French media in 2013 estimated the deal at 200 million euros (230 million USD at the exchange rate of that time).

The repayment terms were extremely tough — the money was to be repaid over seven years, with a two-year grace period, and at an interest rate of LIBOR (London Inter-Bank Offered Rate) plus 6.5 per cent.

The Ematum bonds were converted into sovereign government bonds with a longer repayment period, but at a higher interest rate under a deal reached with bondholders in April 2016. What remained of the Ematum bonds were swapped for government bonds for 585.5 million USD maturing in 2023. The interest rate, however, shot up to 10.5 per cent.

The new arrangement was a bullet bond � that is, the government would not have to repay the capital until 2023. Until then it would only be obliged to make annual interest payments. The government’s assumption was that by 2023, revenue will be flowing in from the vast natural gas fields in the Rovuma Basin, off the coast of the northern province of Cabo Delgado.

However, the public debt situation proved much worse than initially believed since the previous government, led by President Armando Guebuza, had hidden from the Mozambican public and from international partners, including the International Monetary Fund (IMF), government guaranteed loans of more than 1.1 billion USD, also from Credit Suisse and VTB, to two security-related companies, Proindicus and MAM (Mozambique Asset Management).

The Proindicus, MAM and Ematum loans added 20 per cent to Mozambique’s foreign debt.