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debt Tuesday, 8 June, 1999, 13:25 GMT 14:25 UK
Mozambique's foreign debt
By Paul Fauvet

If all goes according to plan, by the end of June Mozambique will finally benefit from the HIPC (Heavily Indebted Poor Countries) debt relief initiative, sponsored by the World Bank and the IMF.

World Debt
It will become the third country to obtain HIPC debt relief - the first two were Uganda and Bolivia.

On paper the deal looks very generous. Mozambique's creditors will wipe off at least $1.44bn (in net present value terms) from the country's debt stock, bringing it down to $1.1bn.

But there are several catches. First, there are conditions attached.

The IMF and World Bank boards accepted Mozambique as eligible for HIPC treatment in April 1998. This was the "decision point". But the actual granting of debt relief - the "completion point" in HIPC jargon - was 15 months in the future.

During that time the Mozambican government was expected to stick rigidly to the targets in its structural adjustment programme with the IMF.

Taxing targets

Among the targets in this programme, and thus conditions for HIPC, are an increase in health service user charges, and the speedy introduction of a Value Added Tax (VAT).

So the government is replacing the traditional sales taxes with the vastly more complicated VAT on 1 June, despite vociferous protests from private businesses.

Almost unanimously, Mozambican business organisations have said the tax change is far too hasty, and their members cannot possibly be ready.

They wanted a postponement until 1 January 2000, but the government's only concession was to move the introduction date from 1 April to 1 June, fearing that any further delay would endanger HIPC.

An IMF team led by the fund's deputy managing director, Shingemitsu Sugisaki, was in Maputo in February checking on compliance with the IMF programme.

Asked whether the IMF's position really was "No VAT, no HIPC", Mr Sugisaki refused to give a straight answer.

The government was taking no chances. Prime Minister Pascoal Mocumbi told reporters that if the IMF was no longer linking HIPC to VAT, "then let them say so".

They would not, and so Mozambique has embarked upon VAT at a faster pace than any other country in Africa, which has embraced this form of taxation.

The real cost

But is HIPC worth it? The $1.44bn sounds like a lot of money. But a more meaningful figure is the amount Mozambique spends on servicing its debt.

According to Finance Ministry figures, between 1996 and 1998 debt servicing averaged $110.8m a year. After HIPC, this figure will come down, but only to about $100m a year.

Mozambique's President, Joachim Chissano, has said the World Bank's initiative is not enough
Thus what HIPC does is simply get rid of the debt overhang - it removes the unpayable debts that Mozambique had been forever rescheduling.

But it still leaves the country with a very substantial annual bill in debt servicing.

The government regards HIPC as just the start, not the end, of debt relief, and continues to urge creditors to scrap the entire debt.

Even on 8 April 1998, within 24 hours of the HIPC "decision point", Mozambique's President Joaquim Chissano was telling the World Bank President, James Wolfensohn, that it was not enough.

He argued that the scale of destruction that Mozambique had suffered during the confrontation with apartheid South Africa was such that it merited writing off the entire debt.

"It would have been significant and helpful if the debt had been forgiven in its entirety", said Mr Chissano, "because this would have saved resources to be used in health, education and other programmes that relate to the needs of the people".

The government's call

An international conference on Mozambique's foreign debt, held in December by the country's parliament, the Assembly of the Republic, called for total cancellation of the debt.

The Assembly noted that debt servicing would have much the same weight in the state budget after HIPC as it had before, which "calls into question the justice and veracity of the sustainability criteria used".

For the World Bank and the IMF, a country's foreign debt is "sustainable" if the debt service ratio (debt servicing as a percentage of total annual exports) is in the region of 20%, and the entire debt stock is between 200 and 220% of annual exports.

The December conference asked why debt sustainability for Mozambique is a 20% debt service ratio, but for Germany, in the aftermath of World War II, it was set at only 3.5%?

The Mozambican Assembly also quoted a few international statistics which show that, if it had the political will to do so, the rich north would have no difficulty at all in pardoning the entire debt.

The most startling of these statistics is that Europeans spend more annually on ice cream than the sum that would be required to provide primary education, clean water and sanitation for the two billion people on the planet who currently have no access to such services.

Links to more debt stories are at the foot of the page.

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