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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 Please note that many outdated links in this archived document may not work.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 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.

URL for this file: http://www.africafocus.org/docs99/debt9907.php