Africa: Mozambique Debt, 12/15/96

UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER

Africa: Mozambique Debt
Date distributed (ymd): 961215

In the first major debt restructuring since this fall's adoption of a new initiative for Heavily Indebted Poor Countries (HIPC), Paris Club creditors of Mozambique decided to forgive $400 million of the $600 million owed by Mozambique for the period 1996 through 1998, the remainder being rescheduled over a twenty-year period. The amount forgiven represents 10 percent of the country's total debt.

As indicated in the following news story from InterPress Service and statement by European non-governmental organizations, however, the action does not yet address the potentially larger debt forgiveness theoretically possible under the HIPC initiative. Six countries (Benin, Bolivia, Burkina Faso, Guyana, Mali and Uganda) have previously been granted stock-of-debt reductions under similar terms received by Mozambique.

More extensive background on the HIPC initiative can be found
(1) on the IMF Web site at
http://www.imf.org/external/np/exr/facts/hipc.htm.
(2) on the World Bank Web site at
http://www.worldbank.org/html/dec/annual/docs/hipc.htm
(3) on the Eurodad Web site at
http://www.ecdpm.org/eurodad/vn.htm
(4) on the Oxfam site at
http://www.oneworld.org/oxfam/policy/papers/debt.htm, and
http://www.oneworld.org/oxfam/policy/papers/uganda.htm

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InterPress Service (excerpts)

MOZAMBIQUE: Paris Club Ruling Undermines HIPC Debt Initiative
- NGOs

[This article reposted with permission. IPS Africa coverage is regularly available in the conference africa.news on the APC networks,and by subscription from PeaceNet World News (for information, send a message to pwn-info@igc.apc.org). For information about cross-posting, send a message to ips-info@igc.apc.org. For more information about access to and reproduction of IPS Africa coverage, contact Peter da Costa in Harare (ipspdc@gn.apc.org).]

By Angeline Oyog

PARIS, Nov 21 (IPS) - The Paris Club of bilateral creditors agreed Thursday to restructure Mozambique's external debts, but non-governmental organisations criticised the Club for failing to give the severely indebted and war-ravaged country sufficient relief.

After a two-day talk with a delegation from Mozambique, the Paris Club took note of the country's low per capita income of 90 dollars and heavy debt burden and offered to write off 67 percent of debt service obligations under eligible loans and credits.

In offering Mozambique this debt restructuring option Thursday, under the 'Naples Terms' rules, the creditors said that they were calling for an ''exceptional treatment of debt'' in Mozambique, to foster economic growth and accelerate development in the country.

But NGOs were hoping for an 80 percent cut, theoretically possible under the Heavily Indebted Poor Countries (HIPC) Initiative.

''It is extremely disappointing that Mozambique, the poorest country in the world, recovering from a bitter and destructive conflict, should not be granted (an) 80 percent reduction,'' said Ann Petitfor of the Debt Crisis Network in London.

According to Petitfor the Paris Club decision on Mozambique was a step backward from the HIPC Initiative under which debtor countries would be given a minimum of 80 percent debt write-off.

Although in disagreement with a number of the features of the HIPC Initiative as designed by the World Bank, the International Monetary Fund (IMF) and the Paris Club, many NGOs have conceded that it still represents an advance on earlier debt reduction options, such as the Naples Terms.

The NGOs criticised in particular the HIPC requirement that indebted countries hoping to benefit would have to sign up for years of painful structural adjustment programmes and early cut-off dates of debts eligible for reduction.

''This Paris Club negotiations with Mozambique shows that the major creditors are not serious about implementing the HIPC initiative, recently agreed in Washington,'' said Petitfor.

''The message of the International Monetary Fund and the Paris Club is that they will maintain their roles as debt-collecting agencies, determined to extract their pound of flesh from the poorest people on this earth,'' she added.

In drawing up the HIPC Initiative, the World Bank had identified Mozambique as one of the eight countries with an unsustainable foreign debt and several NGOs had hoped that the Paris Club would initiate a ''drastic'' write-off of the country's obligations.

According to figures from the Mozambique government, the stock of external debt had reached 5.3 billion dollars by the end of 1995, of which 1.1 billion was overdue.

Between 1985-1995, multilateral debt stock rose from 113.2 million to 1.6 billion, or an increase of 1,322 percent. It also grew from four percent of total debt stock in 1985, to 30 percent in 1995.

Its multilateral debt service from 1997-2002 is expected to rise by 61 percent, from 58.6 million dollars to nearly 95 million dollars. Debt service is likely to fall between 2002 and 2010, but will grow substantially from 2010 onwards.

Bilateral debt stock has grown by an average 11 percent during the 1985-1990 period, with the Paris Club debt largely owed to France, Italy, Portugal and Germany.

The government estimates that from 1997 until 2003, the year Mozambique hopes to benefit from the HIPC initiative, global debt service would rise to 190.6 million dollars a year, compared to 57 million between 1990-1995, representing an increase of 234 percent in average payments.

But even with relief from the HIPC Initiative, the Mozambique Planning and Finance Ministry forecasts debt service bills of 172.5 million dollars in 2004 and 170.5 million in 2005.

Petitfor pointed out that Mozambique is still recovering from a long and destructive civil war which ended only four years ago. ... She added that it has carried out an uninterrupted IMF programme for 10 years. Yet despite 12 years of successive Paris Club rescheduling and a moratorium on bilateral borrowing since 1990, Mozambique's debt burden has continued to grow heavier.

''The debt has grown not because Mozambique has carried on borrowing, but because of what (is) called the magic of compound interest. ... '' said Petitfor. ...

''We know that in Mozambique, 190 million dollars a year could be put to very good use by the government. Infant mortality rate is tragically high and its young children are badly malnourished,'' she said.

That Mozambique's debts are simply unpayable should have been the most powerful economic reason for a massive write-off, said Petitfor. Citing Bank sources, arrears in 1990 constituted 90 percent of debt service due. In 1993, the arrears had decreased but still made up 81.2 percent of debt service due.

''The Paris Club continues to maintain a charade of re-scheduling and reshuffling these unpayable debts,'' she said.

''This has two effects: it maintains the debt overhang for Mozambique, retarding her economic development, primarily by discouraging investment and encouraging capital flight. Secondly, it undermines the credibility of the Paris Club process itself.''

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Statement from European Network on Debt and Development

EURODAD - European Network on Debt and Development, Square Ambiorix 10, B-1000 Brussels, Belgium; Tel: 32.2.743 87 95, Fax: 32.2.732 19 34, E-mail: eurodad@knooppunt.be; Web: http://www.ecdpm.org/eurodad/.

EURODAD is a network of European non-governmental organisations (NGOs) from 15 countries working on issues related to debt, structural adjustment and the accountability of the Bretton Woods Institutions.

Paris Club Meeting on Mozambique November 1996

Mozambique went to the Paris Club on 20 and 21 November 1996, where the restructuring of Mozambique's bilateral debt was discussed. The meeting was chaired by Francis Mayer, Assistant Secretary of the Treasury for International Affairs at the Ministry of Economy and Finance. The Mozambican delegation was led by Adriano Alonso Malbiana, Governor of the Central Bank of Mozambique, and included also the Minister of Planning and Finance. This Mozambican Paris Club meeting could also be seen as a first concrete case that shows how seriously international creditors will deal with the HIPC Debt Initiative.

The outcome was disappointing as EURODAD had expected it: only 67% debt relief were agreed with a consolidation period of 32 months, until June 1999, the period of the IMF's ESAF programme. The IMF and World Bank have argued for giving Mozambique 80% debt relief in June 1997, when the country is to be invited to a new meeting with the Paris Club. One wonders why creditors have not given now 80%, instead of waiting another seven months.

IMF Managing Director Michel Camdessus stated during a visit to Maputo, last October, that the Paris Club should go beyond the Naples terms and give 90% debt reduction. At the same time, the IMF together with the World Bank, is said to recommend that Mozambique because of a recent drop back in economic performance needs to show first a better track record, which will delay its eligibility for an overall treatment of its debt stock with a range of years. This is very disturbing, because in the past years Mozambique has been praised for its commitment to IMF and World Bank programmes.

After its independence from Portuguese colonial rule, Mozambique made a crucial contribution to political change in Zimbabwe and South Africa. As a consequence and in the context of the East-West conflict, the country was almost completely destroyed by insurgency, foreign intervention and war. Despite this war, that went on until 1992, the Mozambican government has been complying with harsh structural adjustment programmes of the IMF and the World Bank since 1987, thus almost for ten years. Mozambique had to follow a policy of initially rigid monetary stabilisation, without paying attention to social consequences or broader concerns on sustainable and social development.

Since 1995 economic growth is stagnating again in Mozambique. The refugee programme is winding down, because the impact of rehabilitation is decreasing. In 1993 there still was high economic growth. 1994 showed a slower increase, growth stopped in 1995 and has remained stagnant in 1996. The IMF and World Bank consider Mozambique therefore as off track; in order to become eligible for the best possible and urgent treatment of its debt, it needs to show first renewed commitment to adjustment. This would delay effective treatment of its debt to several years beyond 2000. In September 1996, the Mozambican Finance Ministry showed in a projection of debt service for 1997-2003 that 67% debt reduction would lead to a further increase of its debt. Furthermore, this would result in substantial higher debt service ratios of 20-25% than the IMF/World Bank regard as sustainable. Debt service is expected to double as a proportion of total government's expenditure, rising to 44% of the total in 2002. Compared to an average of $57 million over the period 1990 - 1995, the average annual (global) debt service payments from 1997 until 2003 will rise to $190 million. An amount of money which could be put to very good use by the government of Mozambique.

Mozambique is a country that has had 12 years of successive Paris Club re-scheduling. Between 1984 and 1993 there have been four external debt rescheduling agreements signed with the Paris Club. Despite this - or in part, because of this and despite a moratorium on bilateral borrowing since 1990 - debt owed to OECD creditors has ballooned from $929.6 million in 1985 to $1.9 billion in 1995. The debt has grown not because Mozambique has carried on borrowing, but because a growth in debt service arising from rescheduling being included successively in subsequent rescheduling. This is owed to what the Mozambique government calls insufficient payment capacity, caused by the difficulties this economy has in earning and retaining hard currency.

Despite its enormous efforts to reform its economy under the aegis of the IMF and World Bank, four years after the end of the war Mozambique has remained one of the poorest countries in the world. The per capita income with +/- US$100, still is about the same as in 1987; industrial production represents just a third of its potential value; agricultural production still was in 1995 below the 1987 level. Today foreign debt is double of what it was in 1984/85, when Mozambique became member of the IMF and five times larger than its GDP. The amount of families living in absolute poverty has increased: this was in 1987 10 to 15% of the population living under the absolute poverty level, now it is more than two-thirds. Also the number of unemployed has grown. Distribution of income and wealth has become more inequable. Infant mortality rate is tragically high, and its young children are badly malnourished, which damages the country's future development potential. The country still lacks the fundamental infrastructure like roads, water, food distribution logistics, an educated workforce and capital, to rebuild the economy that fell apart and fragmented in small informal activities, that have not recovered yet.

In the absence of an international independent, insolvency procedure, which could give impartial, rational and due recognition to what is in effect Mozambique's bankrupt state - the Paris Club continues to maintain a charade of re-scheduling and re-shuffling these unpayable debts. This has two effects; First, it maintains a debt overhang effect for Mozambique - retarding her economic development primarily by discouraging investment and encouraging capital flight. Second, it undermines the credibility of the Paris Club process because it imposes the harshest possible discipline on debtors, and no discipline whatsoever on creditors.

We do not believe that it is very productive now to engage further in a debate whether this lack of progress has been caused by the programme as such or by a deficient implementation. The people and government of Mozambique need to find a way out. The global community can help them by creating better conditions. The early and optimal implementation of the HIPC Debt Initiative, or in other words deep and timely debt reduction is one of these crucial conditions. This also is important for securing the peace process in the country. Obviously, this just would be a first step on the road to sustainable economic and social development.

For more information about the Mozambican debt situation or the HIPC Debt Initiative, please contact the EURODAD Secretariat (eurodad@knooppunt.be).

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Message-Id: <199612152359.PAA13303@igc3.igc.apc.org> From: apic@igc.org Date: Sun, 15 Dec 1996 18:54:57 -0500 Subject: Africa: Mozambique Debt

Editor: Ali B. Ali-Dinar

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