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Mozambique: Debt Relief Commentary
Mozambique: Debt Relief Commentary
Date distributed (ymd): 990707
Document reposted by APIC
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Southern Africa
Issue Areas: +economy/development+
Summary Contents:
This posting contains an analysis of the new debt relief terms
for Mozambique announced by the IMF and World Bank on 30 June,
by a researcher associated with the UK Jubilee 2000 campaign.
The researcher notes that higher than expected but still
insufficient funding levels were required by application of
the previous formula limiting the "sustainable" debt level to
less than 200% of export earnings, adjusted according to new
higher estimates of debt and lower estimates of export
earnings.
For more information:
Jubilee 2000 (UK):
http://www.jubilee2000uk.org/main.html
Eurodad (analysis of new HIPC terms after Koln summit, to be
posted on site soon):
http://www.oneworld.org/eurodad
Africa Policy Debt Action Page (additional links):
http://www.africapolicy.org/action/debt.htm
+++++++++++++++++end profile++++++++++++++++++++++++++++++
Mozambique Gains an Extra $28 Mn per Year from HIPC Debt
Relief but IMF Imposes New Conditions on Cashew and Rural
Water
Joseph Hanlon, 5 July 1999
(jhanlon@jubilee2000uk.org)
Contents:
1. HIPC (Heavily Indebted Poor Countries) Debt Relief
$41 million a year
Money for health & education
More negotiations & more relief due
Unions & government call for 100% cancellation
2. Policy Framework Paper (PFP) and Conditions
How conditions are imposed
Cashew nuts & water
Higher taxes but more spending
3. Technical Notes
Actual debt service payments
HIPC terms
Why is debt relief larger?
Transparency and web references
What is Mozambique's GDP?
1. HIPC Debt Relief
$41 Million per Year
Mozambique's debt service payments have been cut by $41
million per year -- $28 million more than expected -- under
the HIPC debt relief announced by the IMF and World Bank on 30
June.
The ostensible reason for the increase is inaccurate
projections made by the IMF when debt relief was first
considered last year (see part 3, below).
But the unexpectedly generous deal is also a reaction to
public pressure from the Mozambican and British governments,
the Mozambique debt group, and Jubilee 2000. Mozambique's
President Joaquim Chissano has repeatedly called for total
debt cancellation. Clare Short, the British International
Development Secretary, said in April that "HIPC has failed to
free up resources for spending on anti-poverty programmes" and
cited the example of Mozambique where "there will be no
significant reduction in actual debt service paid."
For the four years 1995-98, Mozambique paid an average of $114
million per year in debt service. The IMF and World Bank
estimate that for the six years 1999-2005, the average will be
$73 million, a saving of $41 million per year. This is
compared to the $13 million saving that had been predicted by
the IMF and World Bank when the decision was made to grant
debt relief in April last year. (Annual figures are given in
part 3, below.)
This year (1999) debt service payments will be 17 per cent of
the government budget and will be larger than spending on
health. By 2001, however, debt service payments will be down
to 11 per cent of the budget and will be similar to government
spending on health.
But the IMF used the debt relief to impose two new free-market
conditions:
+ Mozambique is to be prevented from rescuing its cashew nut
processing industry, ensuring the continued unemployment of
10,000 workers, half women.
+ The government will not be permitted to provide clean water
to many of the poorest people in rural areas. (See part 2,
below)
Money for Health & Education
The money saved due to reduced debt service payments will be
spent mainly on health and education. Prime Minister Pascoal
Mocumbi announced in December 1998 that health spending would
rise from $40 million in 1998 to $57 million in 1999, and
education spending from $80 million to $96 million.
But these large increases are still short of what the
government needs to spend; there is a shortfall of at least
$16 million per year in health and a larger gap in education,
according to the government. The extra debt relief will fill
the gap.
More Negotiations & More Relief Due
Mozambique needs to go back to the Paris Club of bilateral
(government) creditors, which is expected to increase the
amount of bilateral debt to be cancelled - to at least 90% of
eligible (i.e. not all) debt. The World Bank assumes this will
be agreed, but this is not guaranteed.
None of this includes any of the agreements made by the G7 in
Cologne (Koln) on 18 June. When implemented, this could cut
debt service payments by another quarter - to an average of
$55 million per year, half the pre-HIPC level.
The "Koln Debt Initiative" will be applied retrospectively,
after the package is agreed at the autumn meetings of the
World Bank and IMF in September. The World Bank in particular
is discussing how to apply what it sees as the new
conditionality outlined in the G7 Koln communique - namely
that debt relief must be linked not just to traditional IMF
macroeconomic conditions, but also to new poverty reduction
targets. Mozambique will have to jump further hurdles before
obtaining relief under the Koln Initiative.
Unions & Government Call for 100% Cancellation
It is "essential" that government and civil society "continue
to struggle for the total cancellation of Mozambique's debt,
within the framework of Jubilee 2000," declared Mozambique's
largest trade union federation, OTM, in a statement responding
to the debt relief granted on 29 June under HIPC.
Although a "substantial" amount of debt has been cancelled,
the remaining debt is still "a heavy burden," OTM continues.
"The country will never have the capacity to repay the present
debt, nor the new debt which is being taken on from the
international financial institutions", notably the IMF and
World Bank.
The Maputo faxed business daily "Metical" suggests that the
government agrees. On 5 July it reported that on 2 July "the
Prime Minister invited representatives of Mozambican
institutions which had fought for the cancellation of debt to
a modest party -- without foreign ambassadors. This was a
signal that the government wanted to applaud the work of these
groups rather than express contentment with the gains. The
signal from the government to these groups was to keep up the
battle for total debt cancellation."
"So far, there is nothing to celebrate," concludes "Metical".
Instead, "leave the celebrations for the day when the whole
debt is cancelled -- and for the day when new loans are
decided by us and channelled intelligently for the creation of
development and well being here.
"For the time being, we continue to get deeper into debt to
enrich international bureaucrats, largely parasitic industries
like consultants, and transnational corporations, and to
generate costs that only require more loans."
2. Policy Framework Paper (PFP) and Conditions
How Conditions Are Imposed
Under the Heavily Indebted Poor Countries (HIPC) Initiative of
the World Bank and IMF, a country only receives debt relief
after jumping two hurdles. First, it must have completed six
years of structural adjustment under the IMF's Enhanced
Structural Adjustment Facility (ESAF). Second, debt relief
itself is a two-step process -- a decision is taken to grant
debt relief, subject to meeting certain additional conditions.
When these are met, the debt is actually cancelled.
For Mozambique, the "decision point" was 8 April 1998, and the
"completion point" was 30 June 1999. Among the conditions
Mozambique had to meet before completion were the introduction
of Value Added Tax and a several-fold increase in health
service charges (the latter was a "social development
performance indicator"). Another condition was that Mozambique
agree a new three-year ESAF programme before completion point
(meaning, in reality, 9 years of ESAF instead of 6).
Thus IMF directors met first on 28 June to approve a new ESAF
programme before they met the next day to approve debt
cancellation. The ESAF programme includes a "Letter of Intent"
and a "Policy Framework Paper" which lay out the structural
adjustment conditions, and which were published 2 July.
Mozambique has had an adjustment programme since 1987, so it
has already completed the privatisation programme and the
other normal IMF requirements.
Cashew Nuts and Water
The ESAF includes two important new free-market conditions.
Mozambique is to be prevented from rescuing its cashew nut
processing industry and the government will not be permitted
to provide clean water to many of the poorest people in rural
areas.
The cashew saga is long and complex. Cashew kernels are inside
hard and acidic shells, and in Mozambique these nuts are
shelled in large factories, which were Mozambique's largest
industrial employer, with 10,000 workers. In 1994 they were
privatised, and the government agreed to maintain a temporary
export tax on unprocessed nuts to allow the new owners time to
modernise their factories. In 1995 the World Bank forced
Mozambique to reverse this promise, and allow the free export
of raw nuts to India were they shelled by hand by children.
The World Bank argued that the free market will impose
efficiency and if children in India will work for less than
women in Mozambican factories, then the factories should
close. A World Bank-funded study said that the competition was
unfair because India subsidised cashew processing, and
Mozambique should have a 20 per cent export duty to create a
"level playing field". The World Bank rejected its own study,
duties were not increased, and all the factories are now
closed. The Mozambican parliament had been expected at a
special session in July to consider a new law to impose a 20
per cent duty or some other export restrictions and thus allow
the factories to reopen. But the new ESAF agreement prevents
this. The "Letter of Intent" says that "the government will
not adopt new, or increase existing, general import surcharges
or export taxes and restrictions."
The rural water restriction is buried in the "ESAF Policy
Framework Paper for April 1999 - March 2002". It says that by
2002 the government must have completed "transforming the
planning and delivery of rural water and sanitation services
from a supply-driven model to a sustained demand responsive
model, characterised by community management, cost recovery,
and the involvement of the private sector." Translating the
IMF jargon, this means that government must stop giving clean
water to those who need it (the supply-driven model) and only
give it those who can afford to pay a private company.
Higher Taxes but More Spending
In a statement on ESAF issued on 28 June after their meeting,
the IMF "directors recognised the scale of the challenges
facing Mozambique, above all to reduce the high incidence of
poverty", with 70 per cent of the population living below the
poverty line. But the directors also stressed the need to
address "poverty and developmental needs without sacrificing
macroeconomic stability". In particular, they called for a
further increase in taxation, but with a reduction in the
rates of tax that have most impact on the better off.
Anti-poverty programmes have a relatively small place in the
PFP and Letter of Intent. Perhaps even more significantly,
there is only one requirement for more transparency and
publication of data, and no demands for additional
consultation with civil society.
In practice, the IMF is letting its star pupil off easy, and
imposing few stringent new demands on Mozambique. One mark of
reduced IMF control is the number of "policy measures"
Mozambique is required to carry out. In the new 1999-2002 PFP
there are only 71, compared to 85 in the previous 1998-2000
PFP. The reduction comes about because some completed
measures, for example relating to privatisation, have been met
and dropped from the PFP, while few significant new demands
have been added.
In general, more growth and economic expansion will be
permitted -- recognising that efforts to reduce inflation had
reached a counterproductive level, and that inflation in 1998
was negative, at -1.3%, leading to the danger of Mozambique
joining the global deflationary trend. The IMF assumes
Mozambique's inflation will rise to 5.5% this year and remain
at 5% a year in future.
The IMF has also allowed a substantial increase in foreign aid
and in government spending, in part reflecting the cost of
national elections and the new government salary scale, but
also allowing some new spending.
Whereas the previous PFP had called for an increase of 22.1%
in government current spending for this year, the new one
calls for a 24.2% increase this year. Similarly, the previous
PFP limited the increase in capital spending to 13% while the
new one allows a 33.7% rise. Finally, the cap is lifted on
"deficit before grant" -- the amount of aid money which can be
spent.
And the IMF has ended its effective tax on aid. Until now,
donors had been forced to "sterilise" part of their aid,
roughly $80 million per year, by putting it in the bank to
build up international reserves rather than spending it on
health and education. Last year's PFP projected that reserves
of nearly $590 million would have to built up by the end of
1999. The new Letter of Intent calls for reserves of only $518
by the end of this year, effectively releasing an extra $72 in
aid money.
With IMF agreement, the government has removed credit
ceilings. This should end the credit shortage. The IMF says it
expects the end to credit limits "to intensify competition
among banks" and to lower interest rates on loans.
The national airline LAM is to be allowed to keep its monopoly
on national trunk routes until the end of 2003. Legislation to
allow competition in telecommunications need not be submitted
to the AR until June 2000.
The IMF has made a few other new demands:
+ a reduction in the top import tariff rate to 25% by 2002
(the top rate was cut from 35% to 30% earlier this year);
+ the probable extension of the Crown Agents contact with the
customs service;
+ by December 1999 prepare new civil service regulations;
+ by January 2000 identify all outstanding applications for
land use titles, and announce a timetable to deal with those
applications; + develop and approve a medium-term expenditure
framework and make the information public;
+ by June 2000 develop a plan for the distribution of shares
in privatised companies which were reserved for workers; and
+ by March 2000 establish a system to report to the Council of
Ministers on the impact of major policy changes on poverty.
3. Technical Notes
Actual Debt Service Payments
The World Bank estimates the following debt service payments
for Mozambique:
Actual debt service paid, before HIPC
Year $ mn
1995 128
1996 135
1997 90
1998 104
average = $ 114 mn/yr
Debt service to be paid, after HIPC
Year $ mn
1999 86
2000 76
2001 67
2002 65
2003 67
2004 71
average = $ 73 mn/yr
HIPC Terms
HIPC is the Heavily Indebted Poor Countries (HIPC) Initiative
of the World Bank and IMF. Up to 41 countries are eligible to
be considered, but not all will receive debt relief. If a
country qualifies, the Paris Club of bi-lateral creditors
agrees to apply all previously available debt cancellation
(Naples terms) and then, under HIPC, all creditors make
proportional cancellations to reduce the debt to a level which
is "sustainable". By definition, this is the level at which a
country is unlikely to default on future debt service
payments, and has nothing to do with development criteria.
For most countries, including Mozambique, an export criterion
of sustainability it used, based on the ratio of total "net
present value" of debt (NPV) to annual earnings from exports
of goods and services (XGS). NPV is defined as the amount of
money that would need to be invested now in order to pay off
the debt; for concessional loans with low interest rates, NPV
is less than total debt, and for poor countries like
Mozambique their NPV debt is roughly half their total debt.
Before HIPC was established, the World Bank estimated that an
NPV of one-and-a-half times annual export earnings would be
sustainable:
NPV/XGS < 150%
but when the World Bank and IMF considered HIPC in 1996 they
felt it would be too expensive to cancel this much debt, so
they selected
200% < NPV/XGS < 250%
even though the World Bank knew this was not really
"sustainable". For Mozambique and most HIPC countries, the
sustainability level was in fact selected at
NPV/XGS = 200%.
The "Koln Debt Initiative" returns to the level that the World
Bank had called for in the first place,
NPV/XGS < 150%
This must be approved at the September meetings of the World
Bank and IMF, and it will be applied retrospectively to
Mozambique.
HIPC debt relief is a two stage process requiring 6 or 9 years
of structural adjustment under the IMF Enhanced Structural
Adjustment Facility (ESAF). A country must have successfully
completed 3 years of ESAF to be considered for HIPC. The
"decision point" is when the IMF and World Bank agree that a
country will be granted debt relief, subject to conditions.
For Mozambique, the decision point was 8 April 1998.
Some debt is actually cancelled at a "completion point", when
the IMF and World Bank establish that the country has
completed another 3 years of ESAF and satisfied the decision
point conditions. For a country like Mozambique which had done
more than 3 years of ESAF before decision point, this is taken
into account, so Mozambique's completion point was 30 June
1999. However, one condition of reaching completion point was
that Mozambique agree a new 3 year ESAF programme, leading to
a total of 9 years of ESAF under HIPC.
Under the Koln Debt Initiative, these timings are changed
somewhat, but this will not have any effect on Mozambique.
Why Is Debt Relief Larger
The unexpected gain for Mozambique comes from three causes.
Two relate to the formula: (NPV/XGS) < 200%.
The NPV of Mozambique's debt is larger and exports of goods
and services lower than predicted by the IMF last year:
+ NPV is the "net present value" of debt, the amount that
would need to be invested now to pay off the debt. Falling
world interest rates mean a present investment earns less, so
NPV of debt increases. + As was widely believed, the IMF
over-estimated the growth of Mozambique's exports, so XGS is
at least 7% lower than expected.
Taken together this means more debt must be cancelled just to
do what the IMF and World Bank promised to do at Mozambique's
decision point in April 1998. Thus these unexpected gains are
really due to the correct application of the already agreed
HIPC formula.
One other change has also been made. Money from the HIPC Trust
Fund will be used to pay off debt from the African Development
Bank and from the World Bank's own IDA. Many of those loans
were coming due now, so cancellation reduces debt service
payments in the short term. This was done at the Mozambique
government's request, as it wanted to cut debt service as
quickly as possible.
Transparency and Web References
In a new wave of transparency, the IMF has moved quickly to
put on the web all but one of the key documents relating to
actions on Mozambique taken on 28 and 29 June. These are:
IMF press statement on HIPC debt relief
http://www.imf.org/external/np/sec/nb/1999/NB9935.HTM
IMF statement on ESAF
http://www.imf.org/external/np/sec/pr/1999/PR9925.HTM
ESAF letter of Intent
http://www.imf.org/external/np/loi/1999/061099.htm
Policy Framework Paper
http://www.imf.org/external/np/pfp/1999/Mozam/index.htm
Policy Framework Paper tables
http://www.imf.org/external/np/pfp/1999/mozam/mztab.htm
Still to be released is the HIPC completion point document on
Mozambique and the related tables.
Mozambicans are now accusing their own government of lack of
transparency. The IMF in May said it would permit Mozambique
to publish the draft PFP and have a public consultation, and
the government of Mozambique refused.
Now the government is being accused of not consulting publicly
on the use of money released by the reduction in debt service
payments. On 5 July "Metical" complained that it appeared that
the government and the Bretton Woods Institutions had decided
in secret, without public consultation, how the money released
was to be used. "We need to know what the government and World
Bank intend for health and education."
WHAT IS MOZAMBIQUE'S GDP?
Recent estimates of Mozambique's Gross Domestic Product, even
by the World Bank and IMF, vary widely, with the largest being
70% more than the smallest. This is not an arcane statistical
debate, because many IMF conditions and some HIPC conditions
are written as percentages of GDP. These are four estimates of
1997 GDP:
GDP GDP Source & Date
$ mn $ per capita
1994 120 World Development Report 1998/99
(World Bank October 1998)
2182 131 Mozambique government budget statement
to parliament (November 1998)
2753 166 HIPC Final Document
(IMF & World Bank, April 1998)
3438 207 ESAF Policy Framework Paper 1999-2002
(IMF June 1999)
This material is being reposted for wider distribution by the
Africa Policy Information Center (APIC). 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 and
individuals.
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