Table 1. Mozambique: Debt Service on Public and Publicly Guaranteed Debt, 1995-2003

Debt Initiative for the Heavily Indebted Poor Countries (HIPCs)

Mozambique—Debt Service

May 1998

Various commentators have criticized the assistance to be provided under the HIPC Initiative to Mozambique as inadequate. In particular debt service paid has been argued to be higher after HIPC debt relief than before. This is simply wrong. Mozambique is expected to receive assistance of US$1.4 billion in NPV terms under the Initiative involving debt relief of nearly US$3 billion in nominal terms. This assistance is worth an estimated 70 percent of Mozambique’s GDP. While traditional debt relief mechanisms were already expected to reduce the stock of Mozambique’s debt by about one half, from US$5 billion in NPV terms at end-1996 to US$2.5 billion at end-1999, HIPC assistance will reduce further the debt stock to about US$ 1 billion. This means that the overall result is to reduce the stock of debt by four-fifths.

The attached table shows the estimated impact on debt service paid. In short

(i)debt service paid after HIPC assistance from 2000–2003 is over US$70 million a year lower than debt service that would otherwise have been paid assuming the full use of traditional debt-relief mechanisms (namely, a Naples terms stock-of-debt operation from the Paris Club involving a two-thirds debt reduction).

(ii)debt service projected to be paid in U.S. dollar terms after HIPC assistance is US$17 million a year lower from 2000–2003 than from 1995–98 (before such assistance). If allowance is made for the Paris Club debt relief provided from 1997–99, which is part of their HIPC assistance, this reduction increases to US$23 million a year;
(iii)debt service paid as a percentage of exports of goods and services declines from over 27 percent in 1995 to less than 9 percent in 2003 after HIPC assistance.
Mozambique was facing a rising burden of estimated debt service after the application full of existing traditional debt-relief mechanisms; the effect of HIPC assistance is to reverse this trend and turn it into a nominal decline in debt service actually paid, thus freeing up resources for health and education spending. The size of this decline in relative terms is underlined by the fall in debt service paid in relation to exports. HIPC assistance also re-establishes normal relations with creditors—under which debt service due equals debt service paid—and removes a debt overhang which may have deterred domestic and foreign private sector investment.

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