IMF and World Bank Support US$600 Million in Additional Debt Service Relief for Mozambique Under Enhanced HIPC Initiative

Mozambique's Total Debt Stock Reduced by nearly three-quarters

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) agreed today that Mozambique has taken the steps necessary to reach its completion point under the enhanced framework of the Heavily Indebted Poor Countries (HIPC) Initiative. Mozambique becomes the third country to reach this point (after Bolivia and Uganda).

Debt service relief under the enhanced HIPC Initiative from all of Mozambique's creditors will amount to approximately US$600 million (US$306 million in net present value (NPV) terms-this includes an additional $53 million to be provided in light of revisions that have been made to the debt data available at the April 2000 decision point). Including assistance provided under the original Initiative, total debt service relief under the HIPC Initiative will amount to about US$4.3 billion.

As a result of HIPC assistance and bilateral debt relief already committed, Mozambique's total external debt is reduced by some 73 percent, and possible additional bilateral relief could raise this figure. The NPV of debt-to-export ratio is expected to remain well below the target ceiling of 150 percent throughout the period 2000-2020 (averaging 77 percent from 2000-2010; and about 44 percent from 2011-2020).

Debt service payments are cut almost in half (from over $100 million in 1998 to an average of US$56 million from 2002-2010), creating room for additional public expenditures on poverty reduction. Debt service as a percentage of government revenue is reduced from 23 percent to an average of just under 10 percent over 2000-2010 and 7 percent over 2011-2020. Resources made available by debt relief provided under the HIPC Initiative will be allocated to key anti-poverty programs, which are outlined in Mozambique's Poverty Reduction Strategy Paper (PRSP).

IDA will provide debt service relief under the enhanced HIPC Initiative of US$80 million (or $63 million in NPV terms). This is in addition to the US$975 million (US$381 million in NPV terms) provided by IDA under the original framework, bringing total debt service relief being provided by IDA to Mozambique to $1055 million ($444 million in NPV terms) . The IMF will provide additional debt service relief under the enhanced HIPC framework of some US$21 million (US$18.5 million NPV), bringing total assistance from the IMF to approximately US$173 million (US$143 million NPV).

ANNEX

1. Mozambique

Steps Required to Reach Completion Point Under the Enhanced HIPC Initiative

Mozambique's eligibility for debt relief under the enhanced HIPC Initiative underscores recognition by the international community of its continued progress in implementing sound macroeconomic and structural policies, and of the overall quality of its Poverty Reduction Strategy Paper.

Upon reaching its decision point under the enhanced framework of the HIPC Initiative in April 2000, Mozambique committed to undertake work in three areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework. These three areas include:

(ii) Continued implementation of strong macroeconomic and structural policies supported by an IMF Poverty Reduction and Growth Facility (PRGF) program; and,

Poverty reduction strategy paper: Mozambique's PRSP (which is officially designated as the Action Plan for the Reduction of Absolute Poverty) was approved by Mozambique's Council of Ministers in April 2001. The PRSP makes explicit the key role of accelerated and broad-based economic growth as a significant element in Mozambique's poverty reduction effort, and sets out six priority areas for continued focus (i) education; (ii) health; (iii) agriculture and rural development; (iv) basic infrastructure; (v) good governance; and (vi) macroeconomic and financial management. In a joint assessment, IMF and Bank staff indicated that Mozambique's PRSP contains a sound strategy for poverty reduction, including its incorporation of inputs from civil society and key stakeholders.

Macroeconomic stability and structural reform: Despite the impact of the floods of early 2000, GDP growth for 2000 measured 2.1 percent in real terms, reflecting aid-financed reconstruction, new foreign direct investment, and the start of production at a new aluminum smelter. These same forces have continued to drive the economy; a return to near double-digit growth is expected during 2001. Progress was also recorded in a smaller-than-expected primary deficit, stabilization of consumer prices after the flood, and a significant narrowing of the current account deficit as a result of higher net exports from large aluminum and energy projects. By end-2000, all quantitative criteria were met for the PRGF-supported program. Although excessive monetary growth in 1999-2000 contributed to an increase in inflation in 2000, the authorities took measures in mid-2001 to stem inflation, which also stabilized the exchange rate. The IMF Board completed the third review of the PRGF on September 20, 2001.

Key Policy Measures and Reforms. Also encouraging has been the successful implementation of critical social and administrative reforms. In the health sector, the delivery of basic services has continued to improve, as have key indicators. For example, diphtheria, pertussis and tetanus (DPT) coverage was raised from 77 percent in 1998 to 92 percent in 2000 (exceeding the target of 80 percent), the proportion of health posts staffed with trained personnel was raised from 86 percent to 93 percent, and the percentage of health posts or centers stocked with Essential Drugs Program kits has also been raised. In education, substantial improvements are being recorded in a number of important areas, including in increasing gross primary enrollment, as well as increasing access to technical, vocational and tertiary education to address acute skills shortages.

These efforts have been matched by strengthening in the area of public sector management, including in enhancing efficiency, transparency and accountability. For example, in the area of budget management, information on actual expenditures for program areas, with a focus on social programs, are now being published on a quarterly basis. One area where progress has been slower than expected is in the area of legal and judicial reform. The need to improve performance in this area has become more evident over the past year with a growing backlog of court cases, and continued concerns among the business and banking communities about corruption and the enforceability of contracts. At the time of the enhanced decision point in April 2000, a strategic plan for the judicial sector was expected to have been completed by end-2000. Over the past year, this plan was broadened substantially to encompass the wider legal community. The government now intends to complete the strategic plan by the end of 2001, and has made some initial progress with legal reform measures, such as the drafting of a modernized commercial code.

2. General

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced HIPC Initiative aims at reducing the NPV of debt at the decision point to a maximum of 150 percent of exports or 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 23 countries under the enhanced HIPC Initiative framework: Benin, Bolivia, Burkina Faso, Cameroon, Chad, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia, for total committed assistance estimated at more than US$34 billion, representing, with other sources of debt relief, an average NPV stock-of-debt reduction of nearly two-thirds.