June 5, 2002

Poor Have Yet To See The Benefits Of Debt Relief

Following in the footsteps of Uganda, Mozambique is now being heralded as a "star pupil" of the International Monetary Fund (IMF) and World Bank promoted structural adjustment programmes. The Southern African country has been praised for its fiscal prudence and macroeconomic performance. So much so that over the last year, Russia, China, Britain and the United States have wiped off most of the country's bilateral debt.

But while the recent financial relief from western creditors was welcomed by the government, NGOs and political analysts have remained reserved about praising the programme. "The recent write-offs were paltry compared to the substantial annual bill in debt servicing. The recent concessions from western governments is simply getting rid of the debt overhang - it removes the unpayable debts that Mozambique had been forever rescheduling," Mozambique Debt Group spokesman, Umberto Zaqueu, told IRIN.

In June 1999, Mozambique completed qualification for the Highly Indebted Poor Countries (HIPC) initiative and was granted debt relief of US $1.7 billion in net present value, reducing its annual debt repayments from US $112 million to US $73 million a year - around US $1.4 million a week. Under the enhanced HIPC formula, payments fell to US $900,000 a week. Today Mozambique spends US $50 million a year on debt servicing, compared to only US $20 million on primary health care and US $32 million on primary education, according to finance ministry figures. Currently, Mozambique owes US $2.1 billion to multilateral organisations like the IMF and the World Bank and another US $6 billion in private debt.

Political analyst Sipho Buthelezi, at the Pretoria-based Africa Institute, told IRIN: "In 1996, the IMF deal looked extremely generous. However, the devil was in the detail. While the recent write-offs will indeed mean more money for social services, it will not address one central question: when will the so-called rewards of this apparent generosity filter down to the people who are most affected by poverty?" Mozambique was one of the first countries to qualify for the HIPC initiative. Its premise is that debt should be reduced to a "sustainable level".

For the World Bank and the IMF, a country's foreign debt is "sustainable" if the debt service ratio is in the region of 20 percent of GDP, and the entire debt stock is between 200 and 220 percent of annual exports. "Even 20 percent of Mozambique's GDP is way too much to ask," Buthelezi said. A recent joint World Bank/IMF report showed that of the five countries already at "completion point", at least two of these did not have sustainable levels of debt - Uganda being one of them.

Jubilee Research, a debt cancellation NGO based in London said: "Uganda's success in using savings from debt relief to such good effect [since HIPC, primary school enrolment has increased and there has been a significant increase in spending on poverty reduction schemes] makes it even more tragic that the country has been failed by the HIPC initiative... According to the World Bank latest projections, Uganda's debt to export ratio was 210 percent in 2000/1 and is projected to remain at 250 percent for the next two years. This means that Uganda's debt will remain over the World Bank's debt sustainability thresholds by as much as 100 percent." The organisation fears the very same thing could happen in Mozambique as the government, like Uganda, increases spending on education and other social services, while it lags behind in improving its export production. "The catch for many developing countries," Buthelezi added, "was that the governments of the 42 countries which qualified under HIPC were expected to stick rigidly to the targets in its structural adjustment programme with the IMF."

In Mozambique's case, the World Bank and IMF demanded an increase in health service user charges, and the speedy introduction of Value Added Tax (VAT). Almost unanimously, Mozambican business organisations said the tax change was far too hasty, and that their members could not possibly be ready. "To increase health service fees, in a country as poor as Mozambique, is both unrealistic and insensitive to the country's situation. Poor people, as it is cannot afford health care. By increasing the price of health services, the financial institutions are in fact denying the people of Mozambique proper health care," Buthelezi noted. Buthelezi added that the apparent success Mozambique represents for the HIPC initiative, "really means that Mozambique is now seen as a 'good debtor' because for the first time it is actually paying what the international community demands".

In recent years Mozambique has only been able to repay around one quarter of the amount demanded by the international community. Even this is more than Mozambique is able to spend on health and education combined. According to the IMF's own figures, in the three years before relief was agreed (1995-1997) Mozambique was paying an average of US $113 million per year. In the three years after relief (1998-2000) Mozambique has paid an average of US $100 million. This reduction of US $13 million represents only US $0.73 per person per year.

However, despite fears that the honeymoon may be short-lived, several important development projects are underway in the country. Foreign investment has grown at a relatively high rate with a number of high profile schemes such as the MOZAL aluminium production project, and a proposed natural gas pipeline from Beira to South Africa. Tax revenue, however, is still insufficient to cover the whole range of government grants. Donor money covers about a half of public spending at all levels, even after debt service reduction following the HIPC initiative. More alarming, though, is that recent studies show that after six years following the HIPC initiative, Europeans spend more on ice cream annually than the sum that would be required to provide a Mozambican child with primary education and clean water. (IRIN)


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