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Mozambique: Debt Relief Decision
Mozambique: Debt Relief Decision
Date distributed (ymd): 980411
Document reposted by APIC
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Southern Africa
Issue Areas: +economy/development+
Summary Contents:
This posting contains several articles, originally posted by Joseph Hanlon,
on the international plan for debt relief for Mozambique.
Additional references on African debt:
http://www.africapolicy.org/action/debt.htm
http://www.j2000usa.org/j2000
+++++++++++++++++end profile++++++++++++++++++++++++++++++
April 9, 1998
MOZAMBIQUE DEBT "RELIEF" MEANS HIGHER DEBT PAYMENTS
Joseph Hanlon
7 Ormonde Mansions
London WC1B 4BJ, England
Tel: +44 171 405 12 53
Fax: +44 171 813 78 84
e-mail: j.hanlon@open.ac.uk
The IMF, World Bank, and other creditors finally sorted out debt cancellation
for Mozambique. But they only canceled debt which would never have been
paid, and debt service payments will actually increase.
Below are:
- a note on extra contributions to fund the deal
- a press statement from the World Bank
- an article from AIM, the Mozambican press agency.
The key point is that debt service will increase, not decrease. Under
HIPC, Mozambique will use 20 percent of export earnings to pay principal
and interest on the remaining debt. By 1999, exports will exceed $500 million
per year. Exact projections have not been published yet, but the 20 per
cent figure means Mozambique must pay at least $100 million per year. AIM
reports that debt service in recent years has been:
1995 - $66.3 mn
1996 - $71.5 mn
1997 - $80.3 mn
1998 - $86 mn predicted
This means Mozambique still must divert essential funds away from health
and education to repay debts. The Ministry of Education has already deferred
universal primary education until 2010, and a recently leaked Ministry
of Education report put the blame entirely on lack of money due to the
need to meet debt service payments.
Minister of Finance and Planning Tomas Salomao is quoted in the World
Bank's own press release to say: "Considering that Mozambique is one
of the poorest countries in the world, and one devastated by war, it would
have been our desire to receive total debt forgiveness."
The Mozambican press agency AIM adds: "Although Mozambique would
have liked to receive total debt forgiveness, Salomao said, the HIPC deal
'is a step in the right direction. It's what is possible now'."
The World Bank and IMF have billed their HIPC (Heavily Indebted Poor
Countries) Initiative as an "exit" strategy -- as the end to
debt negotiations. But Salomao's comment make clear this is not true in
the case of Mozambique.
Salomao is quoted by the World Bank to say "The Mozambican Government
also feels indebted to the NGOs and many individuals who have supported
the special measures for resolving Mozambique's debt problem." That
is particular praise for the Mozambique debt group, as well as for international
groups such as Oxfam, Jubilee 2000 and Eurodad which have taken up the
issue and kept up the pressure.
Finally, it should be noted that the 7 April decision is just that --
it is a decision that debt will be cancelled in June 1999. Cancellation
will only take place if Mozambique continues to follow the much-criticised
structural adjustment programme. This includes the partial privatisation
of profitable port and railway facilities.
EXTRA WRITE OFFS --
BRAZIL AND BRITAIN HELP, BUT GERMANY SAYS NO
Mozambique's debt write off has been especially complex and difficult,
because under the HIPC Initiative, up to 80 per cent of debt is to be written
off. In the case of Mozambique, to reach what the World Bank considers
a "sustainable" level (although, as we argue above, this probably
involves higher payments), Mozambique needed nearly 90 per cent write off.
The Paris club of bilateral creditors, meeting in mid-January, refused
to go above 80 per cent debt write-off. This left a gap of more than 100
million dollars, which was to be met by individual contributions. The decision
announced on 7 April was only possible when enough countries had agreed
to donate extra money.
Initially, Germany and Japan were the major hold outs. In the end, Japan
agreed to cancel 88 per cent of debt, which left only Germany standing
out. Other countries such as Britain contributed -- this is, in effect,
aid to Germany, not Mozambique.
The exact amount of the Japanese contribution is not specified, while
the Netherlands and Italy have contributed but not said by how much. The
eight other contributors are: $ 10 mn Brazil; $ 10 mn Britain; $ 5.6 mn
Canada; $ 5 mn Portugal; $ 5 mn France; $ 2 mn United States; $ 1.5 mn
Belgium; $ 1 mn Sweden.
WORLD BANK PRESS RELEASE:
DEBT RELIEF PACKAGE OF NEARLY US$3 BILLION APPROVED FOR MOZAMBIQUE
WASHINGTON, April 7, 1998 The World Bank and the International Monetary
Fund, along with other creditors, today agreed to provide exceptional support
amounting to nearly US$3 billion in nominal terms in debt-service relief
for Mozambique. The assistance under the Initiative for Heavily Indebted
Poor Countries (HIPC), will reduce the external debt burden, free budgetary
resources and allow Mozambique to broaden the scope of its development
effort.
This assistance to Mozambique will reduce its external debt by US$1.4
billion in net present value (NPV) terms in June 1999, which translates
into debt-service relief over time of nearly US$3 billion. This debt relief
represents over 70 percent of Mozambique's annual gross domestic product
(nearly US$2 billion in 1997). The World Bank and the IMF will contribute
US$324 million and US$105 million, respectively, in NPV terms. This package
is subject to confirmation by all Mozambique's other creditors and continued
implementation of its economic and social reform agenda.
The World Bank will provide part of its contribution in the form of
International Development Association (IDA) grants -- as opposed to the
normal credits. Between now and June 1999, US$270 million will be provided
for work in agriculture, education, water and balance of payments support.
The greatest potential source of growth for Mozambique is its rural agricultural
sector where 80 percent of its population lives. The remainder of IDA support
to Mozambique will be channeled through the HIPC Trust Fund in a process
which, in June 1999, could cancel more than half a billion US dollars of
the country's debt. The total amount of debt service savings generated
by the World Bank, combining the IDA grants and the debt purchase, will
be US$880 million.
The IMF will provide its assistance in June next year in the form of
a grant to be used to service debt falling due to the IMF. Total debt service
savings will be US$124 million.
The case of Mozambique is special in that the international community
has had to make an exceptional effort beyond what was initially envisaged
by the HIPC Initiative. In response to Mozambique's efforts to address
the complex problems of a post-conflict society, the international community
has responded with special efforts of its own. The commitments of the Paris
Club, including the Russian Federation (as Mozambique's single largest
creditor), have been fundamental to the success of the HIPC Initiative
for this vulnerable African nation. So, too, have the fund-raising efforts
of many countries which are supporting this Initiative, including those
which stepped in to help the multilateral institutions cover the remaining
financing gap.
The debt relief agreed today is part of a broader effort, including
other ongoing traditional debt relief mechanisms. All of these efforts
combined will reduce Mozambique's external debt from US$5.6 billion in
NPV terms in late 1996 to US$1.1 billion in June 1999 when the HIPC package
is implemented. Debt service payments will have been reduced to below 20
percent of export earnings. The stock of debt in NPV terms will be reduced
to 200 percent of exports compared to 466 percent without the Initiative.
The HIPC assistance for Mozambique is a recognition of the country's
record of economic reform. The Government has driven inflation down from
70 percent in 1994 to less than six percent in 1997. One of the most successful
privatization programs in Africa has placed over 900 out of 1,200 public
enterprises in private hands, including the entire banking sector. In the
social sectors, Mozambique has ambitious integrated expenditure programs
in health and education through which the Government hopes to raise the
country's social indicators towards levels at least comparable to the average
of Sub-Saharan African countries by the turn of the century.
Commenting on today's announcement, Mozambican Minister of Finance and
Planning, His Excellency Tomaz Salomao said: "Our thanks are extended
to all creditors and development partners of Mozambique, especially the
Paris Club and the multilateral institutions, for the cooperative spirit
they have demonstrated. The Mozambican Government also feels indebted to
the NGOs and many individuals who have supported the special measures for
resolving Mozambique's debt problem.
"Considering that Mozambique is one of the poorest countries in
the world, and one devastated by war, it would have been our desire to
receive total debt forgiveness. But we understand that to achieve what
has been decided is a considerable effort by our creditors and represents
a very important result for Mozambique. It will allow our Government to
use its scarce resources to address the urgent needs of the Mozambican
people.
"On this occasion, the Mozambican Government wants to reiterate
its firm commitment to continue its reform program and to use the resources
freed by the HIPC operation towards lowering the incidence of poverty and
developing the social sectors."
Mozambique is the sixth country to benefit under HIPC, raising the total
debt relief committed under the Initiative to nearly US$6 billion in nominal
debt service relief and US$3 billion in NPV terms.
The HIPC Initiative is a coordinated effort by the international financial
community to reduce the external debt burden of heavily indebted poor countries
to sustainable levels. The countries are pursuing World Bank- and IMF-supported
adjustment and reform programs.
[Note: A mistake many of us (including me) make, is that HIPC is HEAVILY
Indebted Poor Country (not "highly" indebted) -- jh.]
AIM News Item:
DEBT RELIEF: HIPC DECISION POINT REACHED
Maputo, 8 Apr (AIM) - Mozambique's Planning and Finance Minister Tomas
Salomao announced at a Maputo press conference on Wednesday that the World
Bank and the International Monetary Fund (IMF) have formally declared Mozambique
eligible for the HIPC (Heavily Indebted Poor Countries) debt relief initiative,
under which Mozambique stands to see 1.4 billion dollars of its debt stock
written off.
Salomao said that the boards of the IMF and World Bank met in Washington
on Tuesday to take the final decision. Last September the two boards had
declared that "in principle" Mozambique was eligible, but there
then followed a period, longer than expected, of reconciling the figures
on the debt with each creditor, and negotiating with bilateral creditors,
notably Russia.
In HIPC jargon, Tuesday was the "decision point". The "completion
point", at which the debt relief is actually implemented, will not
be until June 1999. Normally, there is a gap of 18 months between the HIPC
decision and implementation points, during which the country concerned
has to stick rigorously to the programmes agreed with the IMF and the World
Bank. In Mozambique's case, this waiting period has been reduced to 15
months, because the Bretton Woods institutions recognise that the delay
in reaching the decision point was not the fault of the Mozambican government.
Unlike most earlier debt relief initiatives, HIPC covers the debt stock
and the interest owed on it, and is a joint effort from both bilateral
and multilateral creditors. For the IMF and the World Bank, HIPC marks
a significant break with the past, when the Bretton Woods institutions
would not even reschedule, let alone cancel, debt.
The exact amount of Mozambique's debt cancelled under HIPC is 1.442
billion US dollars (net present value at the completion point). In nominal
terms, the amount cancelled is much higher - about 2.9 billion dollars.
(The difference is that the nominal amount includes the interest that would
have been paid on the cancelled debt stock.)
Of the 1.4 billion dollars relief, 916 million dollars has been granted
by bilateral creditors (mostly members of the Paris Club, which is the
liaison body of the main creditor nations), and 526 million by multilateral
agencies, mainly the World Bank and the IMF.
Although Mozambique would have liked to receive total debt forgiveness,
Salomao said, the HIPC deal "is a step in the right direction. It's
what is possible now".
Salomao said the HIPC deal for Mozambique meets the debt sustainability
requirements set forth by the IMF and the Bank. These were that the debt-stock-to-exports
ratio should be between 200 and 250 per cent, and the debt service ratio
between 20 and 25 per cent.
In Mozambique's case, the ratios were set at the lower end of the band.
The World Bank says that after HIPC, Mozambique will have a debt-stock-to-exports
ratio of exactly 200 per cent - which compares with today's figure of 466
per cent. The export figure used in these calculations is the average of
the past three years exports of goods and services. As for the debt service
ratio, this comes down to under 20 per cent, and, according to World Bank
projections, will drop to less than 10 per cent by 2002.
One of the World Bank's executive directors for Africa, Joaquim de Carvalho,
who also attended the press conference, stressed that Mozambique had been
granted "the lowest possible ratios".
Furthermore the 1.4 billion dollars of relief was roughly equal to the
total relief given to all five other countries previously admitted to the
HIPC initiatives (Uganda, Bolivia, Guyana, Burkina Faso and Ivory Coast),
said Carvalho.
Asked what conditions the Mozambican government would have to follow
for the next 15 months so that HIPC debt relief will become a reality,
Carvalho said it must work with the macro-economic framework already agreed
with the Bank and the IMF, which contains such targets as low inflation
and currency stability.
The government must also continue "restructuring" the economy:
he made it clear that this means more privatisations, particularly leasing
out port and rail infrastructures to private management. Finally, it must
continue to increase the revenue from the state budget allocated to the
social sectors (health, education and water supply).
He stressed that HIPC is in addition to the Naples Terms already granted
by the Paris Club, and to the 80 per cent reduction of the debt owed to
Russia, as agreed in negotiations between Mozambican and Russian teams
in January. The deal with Russia brought the total debt down from over
7.2 billion dollars to 5.526 billion today, in nominal terms.
In net present value terms, that is 3.304 billion dollars. Implementation
of Naples terms by the Club of Paris would bring the debt down to about
2.5 billion dollars. HIPC relief comes on top of this, and means that in
June 1999 Mozambique's debt stock, in net present value terms, will stand
at 1.1 billion dollars.
Carvalho admitted that the last few months had been difficult, because
the Paris club, meeting in mid-January, had agreed only to an 80 per cent
debt write-off. This was "not sufficient", and left a gap of
116 million dollars between what was on offer and debt sustainability.
"It was necessary to contact donors to make voluntary contributions",
said Carvalho. "Only yesterday was this process completed".
Among those forced to make extra contributions because of Paris Club
penny-pinching were the Bretton Woods institutions themselves - the World
Bank made an extra 29 million dollars available, and the IMF an extra 10
million.
Although Bank and IMF representatives are reluctant to criticise the
Paris Club publicly, the multilateral institutions are clearly annoyed
that an apparent agreement of last year whereby the bilateral creditors
would reduce the debt stock by perhaps as much as 90 per cent was reneged
upon.
Paris Club members themselves are divided on the issue. Britain had
urged more generous terms, but met resistance from Japan and Germany in
particular.
In the 15 months before the "completion point", other measures
will take effect. World Bank Maputo representative James Coates announced
that in the coming World Bank financial year (July 1998-June 1999) assistance
from the Bank will take the form of grants rather than loans from the International
Development Association (IDA), the Bank affiliate specialised in lending
to developing countries.
270 million dollars of IDA grants will be available in this period,
and includes the initial Bank funding for the government's new agricultural
programme, PROAGRI.
Salomao also announced that, after the 80 per cent reduction of the
pre-cut off date (1984) debt to Russia, further discussions with Russia
have led to an agreement in principle to cut the post cut-off date debt
by 50 per cent. Figures distributed by Salomao show that the total debt
repayments (interest and capital) made by Mozambique from 1990 to 1997
amounted to 507.6 million dollars.
The amount paid annually is rising - one of the factors that makes HIPC
such a pressing need. In 1995, 66.3 million dollars was paid, in 1996 71.5
million, and in 1997 80.3 million. The projected figure for debt payments
in 1998 is 86 million dollars. (AIM)
This material is being reposted for wider distribution by the Africa
Policy Information Center (APIC), the educational affiliate of the Washington
Office on Africa. APIC's primary objective is to widen the policy debate
in the United States around African issues and the U.S. role in Africa,
by concentrating on providing accessible policy-relevant information and
analysis usable by a wide range of groups individuals.
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