Press Release No. 98/12

The World Bank and the International Monetary Fund (IMF), along with other creditors, today agreed to provide exceptional support amounting to nearly US$3 billion in nominal terms in debt-service relief for Mozambique. The assistance under the Initiative for Heavily Indebted Poor Countries (HIPC)¹, will reduce the external debt burden, free budgetary resources and allow Mozambique to broaden the scope of its development effort.

This assistance to Mozambique will reduce its external debt by US$1.4 billion in net present value (NPV) terms in June 1999, which translates into debt-service relief over time of nearly US$3 billion. This assistance represents over 70 percent of Mozambique’s 1997 gross domestic product. The World Bank and the IMF will contribute US$324 million and US$105 million respectively in NPV terms. This package is subject to confirmation by all Mozambique’s other creditors, and continued implementation of its economic and social reform agenda.

The World Bank will provide part of its contribution in the form of International Development Association (IDA) grants -- as opposed to normal credits. Between now and June 1999, US$270 million will be provided for agriculture, education, water, and balance of payments support. The greatest potential source of growth for Mozambique is its rural agricultural sector where 80 percent of its population lives. The remainder of IDA support to Mozambique will be channeled through the HIPC Trust Fund in a process which, in June 1999, could cancel more than US$500 million of the country’s debt. The total amount of debt service savings generated by the World Bank, combining the IDA grants and the debt purchase, will be US$880 million.

The IMF will provide its assistance in June next year in the form of a grant to be used to service debt falling due to the IMF. Total debt service savings will be US$124 million.

The case of Mozambique is special in that the international community has had to make an exceptional effort beyond that initially envisaged by the HIPC Initiative. In response to Mozambique’s efforts to address the complex problems of a post-conflict society, the international community has responded with special efforts of its own. The commitments of the Paris Club, including the Russian Federation (as Mozambique’s single largest creditor), have been fundamental to the success of the HIPC Initiative for this vulnerable African nation. So, too, have the fund-raising efforts of many countries which are supporting this Initiative, includingthose which stepped in together with the multilateral institutions to provide the necessary financing.

The debt relief agreed today is part of a broader effort, including other ongoing traditional debt relief mechanisms. All of these efforts combined will reduce Mozambique’s external debt from US$5.6 billion in NPV terms in late 1996 to US$1.1 billion in June 1999 when the HIPC package is implemented. Debt service payments will be reduced to below 20 percent of export earnings. The stock of debt in NPV terms will be reduced to 200 percent of exports, compared to 466 percent without the Initiative.

The HIPC assistance for Mozambique is a recognition of the country’s record of economic reform. The Government has driven inflation down from 70 percent in 1994 to less than six percent in 1997. One of the most successful privatization programs in Africa has placed over 900 out of 1,200 public enterprises in private hands, including the entire banking sector. In the social sectors, Mozambique has ambitious integrated expenditure programs in health and education through which the Government hopes to raise the country’s social indicators towards levels at least comparable to the average of Sub-Saharan African countries by the turn of the century.

Commenting on today’s announcement, Mozambican Minister of Finance and Planning, His Excellency Tomáz Salomão said: "Our thanks are extended to all creditors and development partners of Mozambique, especially the Paris Club and the multilateral institutions, for the cooperative spirit they have demonstrated. The Mozambican Government also feels indebted to the NGOs and many individuals who have supported the special measures for resolving Mozambique’s debt problem.

"Considering that Mozambique is one of the poorest countries in the world, and one devastated by war, it would have been our desire to receive total debt forgiveness. But we understand that to achieve what has been decided is a considerable effort by our creditors and represents a very important result for Mozambique. It will allow our Government to use its scarce resources to address the urgent needs of the Mozambican people.

"On this occasion, the Mozambican Government wants to reiterate its firm commitment to continue its reform program and to use the resources freed by the HIPC operation towards lowering the incidence of poverty and developing the social sectors."

Mozambique is the sixth country to benefit under HIPC, raising the total debt relief committed under the Initiative to nearly US$6 billion in nominal debt service relief and US$3 billion in NPV terms.

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¹The HIPC Initiative is a coordinated effort by the international financial community to reduce the external debt burden of heavily indebted poor countries to sustainable levels. These countries need to pursue World Bank- and IMF-supported adjustment and reform programs.