News Brief No. 99/35

News Brief: Mozambique to Receive US$3.7 Billion in Debt Relief Through the HIPC Initiative

June 30, 1999

The International Monetary Fund (IMF) and the World Bank’s International Development Association (IDA) have agreed that Mozambique has met the requirements for receiving close to US$3.7 billion in debt relief from its external creditors under the Heavily Indebted Poor Countries (HIPC) Initiative.¹ The total debt relief package is worth US$1.7 billion in today’s values².

The IMF and IDA agreed to increase the assistance beyond the US$2.9 billion (US$ 1.4 billion in today’s values) originally committed in April 1998 to ensure that Mozambique reached the agreed debt sustainability target. The relief was granted in the context of Mozambique’s demonstrated record of economic and social reforms.

This is the largest debt relief operation organized by the international community under the HIPC Initiative so far, and raises the total relief granted under the HIPC Initiative to US$5.5 billion (US$2.7 billion in today’s values). Mozambique is the fourth country to reach the completion point under the HIPC Initiative, along with Uganda, Bolivia, and Guyana.

The HIPC Initiative debt relief will reduce Mozambique’s external public debt by almost two thirds, from about US$2.7 billion to US$1 billion in today’s values, on top of debt relief provided under traditional mechanisms. Mozambique’s external debt-service obligations will fall to an annual average of US$73 million in 1999-2005, compared with an average of US$169 million that would have been due in the absence of HIPC Initiative relief, and the US$104 million actually paid in 1998. By 2001, debt service due would fall to 8 percent of exports and 10 percent of government revenues, compared with 19 percent of exports and 23 percent of revenues actually paid in 1998.

Mozambique remains one of the world’s poorest countries, with about 70 percent of its population living in poverty. Debt relief is expected to help deepen the social benefits of good economic management and will enable the Government of Mozambique to sustain increases in spending for social development. Taking into account the relief, the Government plans to increase annual current spending on health and education from about US$120 million in 1998 to US $175 million by 2001, or from just over the amounts paid in debt service in 1998 to more than double the projected debt-service payments after HIPC Initiative assistance.

Mozambique has been pursuing a wide-ranging program of economic stabilization and structural reform, which has been reaping impressive results. Market liberalization, completion of an ambitious privatization program, fiscal reform, and progress on public sector reform have contributed to strong economic growth, which has averaged more than 8 percent per year over the past five years. In addition, the Government has made notable progress in expanding the delivery of health, education, and water services, as well as in expanding the road network. As a result, for example, the primary school enrollment rate increased from 62 percent to 71 percent between 1996 and 1998, and coverage for key vaccinations increased from 58 percent to 77 percent over the same period. Between 1992 and 1998, the number of primary classrooms, including those in rural areas, increased by more than 60 percent.

IDA will provide debt service relief to Mozambique equivalent to US$975 million, or US$381 million in today’s values. This debt reduction will be delivered mainly through the purchase and cancellation by the HIPC Trust Fund of IDA credits, resulting in debt service savings of US$327 million in today’s values. In addition, an IDA grant has been made to support improved economic management, which will provide debt service savings of US$54 million in today’s values.

The IMF assistance under the HIPC Initiative will take the form of a grant deposited into an escrow account to be used to cover part of the debt service falling due to the IMF. This assistance, to be delivered over the life of outstanding obligations to the IMF, will amount to about US$125 million in today’s values.

In addition to the delivery to Mozambique of HIPC debt relief agreed upon this week, Mozambique is expected to benefit from the changes proposed by the recent G-7 Cologne Summit to strengthen the HIPC Initiative. Once agreement is reached on an enhanced HIPC Initiative, additional HIPC Initiative assistance will be considered for Mozambique.

² Debt relief under the HIPC Initiative is expressed in net present value (NPV) terms—today’s values—which discounts future debt service payments to the current year’s values, using current discount (interest) rates and exchange rates.