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This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.

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:

  1. a note on extra contributions to fund the deal
  2. a press statement from the World Bank
  3. 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.


URL for this file: http://www.africafocus.org/docs98/debt9804.php