Mozambique debt & new conditions (fwd)

[Robert Weissman <rob@essential.org>]

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

Contents:
1. HIPC debt relief
        $41 million a year
        Money for health & education
        More negotiations & more relief due
        Unions & government call 
             for 100% cancellation
2. 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. 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)