Mozambique's relations with donors have been rocked by a revelation that the government had taken dubious loans worth more than 2 billion dollars for three companies.
They include more than 1.3 billion dollars in loans to two state companies, partly from Credit Suisse and Russia’s VTB, that had been kept secret from donors and parliament.
The government also guaranteed a loan of 850 million dollars to the tuna fishing company Ematum, which is now believed to be bankrupt.
A large part of the money was used to acquire navy equipment in illegal deals financially benefiting the ruling elite, according to the newsletter Africa Confidential.
"Their main objective was to get money for their businesses using the state," said Fatima Mimbire from the anti-corruption watchdog Centre for Public Integrity.
"The debt is a multimillion-dollar scam. We turned a blind eye to mega-corruption," said a source from a donor country who did not want to be identified.
Donors have now cut direct budgetary aid amounting to about 270 million dollars or 10 per cent of the government budget. The International Monetary Fund has also suspended lending to Mozambique.
"We want to solve this problem as soon as possible," Finance Ministry spokesman Rogerio Nkomo said.
He added that Mozambique expects the IMF to demand a new mechanism to access information on government debt, as well as a repayment plan.
Donors are meanwhile discussing whether they need forensic audits to track down the secretly borrowed money, the donor source said.
"Budgetary support will stay away until the end of the year at best,” he added.
The hidden debts and the devaluation of the metical are expected to push the ratio between public debt and gross domestic product to more than 100 per cent, according to the rating agency Fitch – a level regarded as practically unsustainable for the impoverished country.
"There is no easy way out of this debt crisis for Mozambique. China may be willing to provide some support, but will balk at ... Mozambique's needs," said Chris McKeon, Africa analyst with the risk consultant Verisk Maplecroft.