Mozambique: Creditors forced to expand debt relief

by Abid Aslam

Washington, Jul 1 -- International creditors have approved debt relief for Mozambique, agreeing to go further than previously announced, to lighten the country's debt burden.

The impoverished nation has met conditions laid down by the World Bank and International Monetary Fund (IMF) for relief under the 'Heavily Indebted Poor Country' (HIPC) initiative, set up in 1996, according to the agencies.

They have approved $3.7 billion in relief from Mozambique's external creditors, up from the $2.9 billion agreed in April 1998.

Were the debts simply to be paid off today, the relief now on offer would amount to $1.7 billion, up from the $1.4 billion offered last year, the Bank says.

The agency's $381 million contribution to the HIPC deal will take the form of grants and trust fund purchases of Mozambican debt. The IMF will use money deposited in a special account to fund $125 million in debt servicing.

The larger package "will reduce Mozambique's external public debt by almost two-thirds from about $2.7 billion to one billion dollars in today's values," according to a Bank statement.

As a result, Mozambique's debt servicing will fall to an average of $73 million per year in 1999-2005, from $169 million due without the relief and $104 million paid last year.

The enhancements are designed with debt-relief activists - and the HIPC initiative's own credibility - in mind, officials say.

Mozambican groups and their allies overseas - notably the Jubilee 2000 coalition, which argues that much Third World debt simply is unpayable and therefore should be written off - have applied constant pressure on the agencies, their more powerful shareholders, and the Paris Club of bilateral lenders.

Activists and observers have argued from the HIPC programme's onset that Mozambique - recovering from civil war and faithful to structural adjustment - would be a litmus test of creditors' much-vaunted efforts to put a dent in Third World indebtedness. "You might discuss the merits of total cancellation with respect to other countries, but Mozambique clearly deserves it," says William Minter, senior research fellow at the Washington-based Africa Policy Information Centre.

Internationally, campaigners have lost no opportunity to turn up the heat at creditors' meetings - including Paris Club sessions over the past year, the IMF-World Bank spring meetings in April and last month's summit of the 'Group of Seven' economic powers plus Russia.

In Mozambique, strong public support for a debt write-off led to a special parliamentary session last December, when the government of President Joaquim Chissano and opposition parties voted unanimously for "total and unconditional cancellation" of foreign creditors' claims against the country.

Mozambique "doesn't have a lot of leverage on (aid and debt) conditionality," says Minter, "but the government has been able to take a stronger position because the international and local campaigns are having an impact."

A total write-off never was in the cards, officials here said at the time, but creditors have been open to activists' appeal that the benefits of relief be ploughed into health and education programmes rather than be used to deepen austerity measures demanded under loans from the IMF's Enhanced Structural Adjustment Facility (ESAF).

"Mozambique remains one of the world's poorest countries, with about 70% of its population living in poverty," according to the World Bank. "Debt relief is expected to help deepen the social benefits of good economic management and will enable the sustain increases in spending for social development."

Mozambique, one of the world's poorest countries, spends roughly twice its education budget and four times its health budget on debt payments, says the relief group Oxfam International.

About 14% is owed to multilateral creditors and about 69% to governments - chiefly Russia, France and other Paris Club members, according to the non-governmental European Network on Debt and Development, better known as EURODAD.

"Attempting to achieve budget stability under conditions of unsustainable debt has had a crippling effect on investment, which has declined in real terms since 1990," Oxfam has warned. "Without a reduction in debt, tight monetary policies will continue to undermine any prospect of an investment-led recovery."

To campaigners' dismay, however, ESAF remains the HIPC initiative's gatekeeper, barring nations not deemed by the IMF to have toed the line on structural adjustment long or well enough.

Indeed, Mozambique's HIPC deal follows the IMF's approval Monday of a $78.5 million, three-year low interest loan for the southern African country.

Mozambique has spared no effort in following IMF and World Bank prescriptions, officials and activists note.

The country was destitute when it won independence from Portugal in 1975 and was further devastated in the 1980s, when its war against an insurgency backed by apartheid South Africa caused damage estimated at $20 billion.

Since sealing a peace settlement in 1992, the government in Maputo has worked assiduously to maintain a good reputation with the Bank and IMF. It has relied on them for much-needed capital and heeding their economic advice - even at the expense of its second-biggest export earner, the cashew-nut industry, which has been decimated by World Bank export-liberalisation reforms.

The Bank demanded that Mozambique stop processing the nuts and instead ship them raw for processing in India, rapidly reducing export taxes in the process. The results proved so disastrous that consultants from the firm of Deloitte and Touche - hired by the Bank itself - declared in 1997 that the agency's prescription - made without talking to people in the industry - "should be abandoned."

Three other countries have won HIPC packages: Uganda, Bolivia and Guyana. (IPS)

The above article by the Inter Press Service appeared in the South-North Development Monitor (SUNS).