When debt write-off is not relief.

On 18 September, the Mozambique Debt Group, a coalition of NGOs and individuals campaigning on the country's foreign debt, led a street demonstration that called for a total write-off of the money owed by Mozambique to its external creditors.

Ironically, this demonstration occurred less than three months after the World Bank and the IMF announced in great pomp that Mozambique was to receive close to $3.7bn in debt relief under the Heavily Indebted Poor Countries (HIPC) initiative (worth $1.7bn in net present value terms).

Despite the large sums involved, debt relief campaigners are not satisfied with the scale of the relief. Are they simply tugging further on the rope or is there some truth to their claim that the debt relief package is insufficient?

Let's examine the situation.

For a start, and partly to reflect the commitments taken by the G-7 following the Cologne 19 June summit, the present value of the debt relief package finally agreed for Mozambique was raised by around $300m over the amount originally committed. This is also the largest debt relief operation organised so far by the international community under the HIPC initiative.

While this is all fine and dandy, what is the impact of the debt relief package on Mozambique's Balance of Payments? According to the World Bank, "Mozambique's external debt-service obligations will fall to an annual average of $73m in 1999-2005, compared with an average of $169m that would have been due in the absence of HIPC initiative relief". However, a more significant comparison is with the amount actually paid by Mozambique. Between 19951998, Mozambique paid an average of $114m per year in debt service, thus the actual saving from the debt relief package is $41m per year.

On the positive side, observed Joseph Hanlon, policy adviser to the Jubilee 2000 coalition, which has relentlessly campaigned for the cancellation of the external debt of the poorest countries, "this is compared to the $13m saving that had been predicted by the IMF and the World Bank when the decision was made to grant debt relief in April last year."

But he reckons that the unexpected gain for Mozambique comes from three causes. First, donors had decided that the ratio of the present value of the external debt divided by the annual exports of goods and services should be 200%. With declining interest rates pushing up present values and export projections for Mozambique revised downwards, a larger amount of debt than planned had to be written off in order to maintain this ratio of 200%. One should note here that the Cologne debt initiative actually proposed a ratio of less than 150% and that this new ratio was approved at the September meetings of the World Bank and the IMF, paving the way for potentially more debt relief. Interestingly, Hanlon remarks that a ratio of less than 150% was also deemed sustainable by the World Bank before the HIPC relief initiatives were first established, but that the benchmark was later increased because "they felt otherwise it would be too expensive." In this regard, noted Oxfam a couple of years ago, "the ratios are based on the experience of much wealthier Latin American countries in the 1980s. Compared to the HIPC countries, the indebted Latin American countries had diversified exports, strong manufacturing bases and more skilled work forces. There is no evidence that their experience is relevant for poor, war torn economies."

Second, part of the windfall also originated from the of debt due by Mozambique to the African Development Fund and the World Bank's IDA. Neither of these organisations have the resources to grant relief on their own but the relief was funded by the HIPC Trust Fund.

The third factor, as stated by Hanlon is that "the unexpectedly generous deal is also a reaction to public pressure from the Mozambican and British governments, the Mozambique Debt Group, and the Jubilee 2000."

Citing the effect of public pressure, Alex de la Forat-Divonne, representative of the French NGO Agir Ici, told African Business that "the offer made by Clinton to cancel 100% of the debt owed by Africa to the US raise hopes that Mozambique will obtain more debt relief."

The minus side

That is on the positive side. However, on the minus side, what Alex de la ForatDivonne and most other debt relief campaigners strongly deplore are the conditions imposed on Mozambique. "Under the HIPC initiative," says Hanlon, "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 twostep 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," says Hanlon, "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 an increase in health service charges. "Another condition was that Mozambique agree a new three-year ESAF programme before completion point (meaning, in reality, nine years of ESAF instead of six)." Two days before completion date, the IMF approved a three-year loan for Mozambique under a new ESAF for about $78.5m.

One new condition imposed on Mozambique was to gradually stop providing clean water to many of the poorest people in rural areas and rely instead on the involvement of the private sector. Another condition, especially targeted at the country's cashew nut industry, required that "the government will not adopt new, or increase existing, general import surcharges or export taxes and restrictions."

This condition was blatantly ignored by the Mozambican Parliament which, early in October, passed a law to increase the levy on exports of raw cashew nuts from 14% to between 18 and 22% in order to protect and revitalise what's left of its local cashew nut processing industry - all but crushed by competition from their subsidised Indian competitors. In an article published by the Financial Times, James Coates, World Bank representative in Maputo, obviously disagreed with this move and argued that "the income of one million farmers (compared with 10,000 processing workers) has in fact increased, both as a percentage of world prices and in real terms" and he also mentioned gains for traders and more efficient factories. Perhaps being tied up in cashew nut negotiations prevented Mr Coates from commenting to African Business on the possibility of granting more debt relief to Mozambique.

Impact on social sector

Discussing the impact of debt relief on the social sector, the IMF "noted with satisfaction the intended strengthening of education and health services, which would benefit from the debt relief". True, savings in debt service that result from the HIPC debt relief initiative are going to fund the mounting health and education budgets, expected to reach $175m in 2001, up from $120m in 1998 and more than double the projected debt-service payments after the HIPC debt initiative.

But this has not stopped someone like Rev. Lucas Amosse of the Mozambican Christian Council, a member of the Mozambique Debt Group, from criticising the size of the write-off since, in his opinion, "the weight of what remains still creates many hurdles for the country's development."

Other analysts also mock the "sustainability" criteria established by the World Bank. Joseph Hanlon, for instance, notes that "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."

Another sharp criticism at the debt relief package involved the lack of consultation with the civil society. In fact, in December 1998, the Mozambican Debt Group issued a statement saying that "despite bank claims to the contrary, there was absolutely no consultation with Mozambican civil society" on the 1997 Country Assistance Strategy and mentioned threats from the World Bank that any broader discussion of it would delay the debt relief initiative. They also referred to a threeyear "total break between Washington and the Maputo office of the World Bank."

Many other hurdles to jump

In any case, implementation of the full debt relief package is still conditional upon agreement from the Paris Club creditors to cancel more bilateral (government) debt. New poverty reduction targets must also be overcome by Mozambique before the extra relief of the Cologne debt initiative, valued at around $18m a year in annual savings, is available.

Yet Hanlon told African Business about his concern that the increase in export duties on cashews just voted by Parliament could be used by the IMF to deny Mozambique additional debt relief. On the other hand, even the World Bank had acknowledged that the current debt relief package may be insufficient, as the following extract from its press release of 30 June shows: "once the agreement is reached on an enhanced HIPC [after changes proposed by the G-7 Cologne Summit], additional HIPC Initiative assistance will be considered for Mozambique."

If and when this occurs also depends on the mechanisms used by the various official creditors to fund the HIPC Trust Fund through which the debt relief will take place.

In the case of the IMF, the sale of gold reserves was contemplated, until much lobbying by gold producers and the American Congress convinced the IMF to cancel its initial plan. (See story on page 19).

Looking to the future, replacing new IMF credits disbursed under ESAF by straightforward grants from the IDA could perhaps help contain the external debt.

The IMF has praised Mozambique for its "strong economic performance in 1998 when real GDP grew by over 10%, inflation fell to single-digit levels, and international reserves rose substantially."

The World Bank also noted with satisfaction that "the primary school enrolment rate increased from 62% to 71% between 1996 and 1998" and just briefly mentioned that 70% of the population of Mozambique still lived in poverty. What the World Bank failed to report is that illiteracy is still 60% in Mozambique, compared with 42% on average in sub-Saharan Africa; life expectancy is 47 years, against 50 years; infant mortality 134 per 1000 live births, against 91 per 1000; and that only 24% of its population had access to safe water, against 47% for subSaharan Africa.

Will the conditions imposed for accessing the debt relief package actually lead to the improvement of these fundamental indicators and at least attack poverty? If not, what is the actual purpose of the debt relief initiative?