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. 
 
--------------------------------------------- 
SWEDEN TO REDUCE DIRECT SUPPORT OF GRM BUDGET 
--------------------------------------------- 
 
¶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. 
 
----------------------------------- 
SWISS CONCERNED ABOUT DOMINO EFFECT 
----------------------------------- 
 
¶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. 
 
---------------------------------------- 
OECD STUDYING CORRUPTION AND GRM FUNDING 
---------------------------------------- 
 
¶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. 
 
--------------------------------------------- 
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. 
 
---------------------------------------- 
NOT ALL G19 AID IS DIRECT BUDGET SUPPORT 
---------------------------------------- 
 
¶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. 
 
--------------------------------------------- ------ 
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