When Debt Write-Off Is Not Relief
De Giorgio, Emmanuelle Moors, African Business
On 18 September, the Mozambique Debt Group, a coalition of NGOs and individuals campaigning on the country's foreign debt, led a street demonstration that called for a total write-off of the money owed by Mozambique to its external creditors.
Ironically, this demonstration occurred less than three months after the World Bank and the IMF announced in great pomp that Mozambique was to receive close to $3.7bn in debt relief under the Heavily Indebted Poor Countries (HIPC) initiative (worth $1.7bn in net present value terms).
Despite the large sums involved, debt relief campaigners are not satisfied with the scale of the relief. Are they simply tugging further on the rope or is there some truth to their claim that the debt relief package is insufficient?
Let's examine the situation.
For a start, and partly to reflect the commitments taken by the G-7 following the Cologne 19 June summit, the present value of the debt relief package finally agreed for Mozambique was raised by around $300m over the amount originally committed. This is also the largest debt relief operation organised so far by the international community under the HIPC initiative.
While this is all fine and dandy, what is the impact of the debt relief package on Mozambique's Balance of Payments? According to the World Bank, "Mozambique's external debt-service obligations will fall to an annual average of $73m in 1999-2005, compared with an average of $169m that would have been due in the absence of HIPC initiative relief". However, a more significant comparison is with the amount actually paid by Mozambique. Between 19951998, Mozambique paid an average of $114m per year in debt service, thus the actual saving from the debt relief package is $41m per year.
On the positive side, observed Joseph Hanlon, policy adviser to the Jubilee 2000 coalition, which has relentlessly campaigned for the cancellation of the external debt of the poorest countries, "this is compared to the $13m saving that had been predicted by the IMF and the World Bank when the decision was made to grant debt relief in April last year."
But he reckons that the unexpected gain for Mozambique comes from three causes. First, donors had decided that the ratio of the present value of the external debt divided by the annual exports of goods and services should be 200%. With declining interest rates pushing up present values and export projections for Mozambique revised downwards, a larger amount of debt than planned had to be written off in order to maintain this ratio of 200%. One should note here that the Cologne debt initiative actually proposed a ratio of less than 150% and that this new ratio was approved at the September meetings of the World Bank and the IMF, paving the way for potentially more debt relief. Interestingly, Hanlon remarks that a ratio of less than 150% was also deemed sustainable by the World Bank before the HIPC relief initiatives were first established, but that the benchmark was later increased because "they felt otherwise it would be too expensive." In this regard, noted Oxfam a couple of years ago, "the ratios are based on the experience of much wealthier Latin American countries in the 1980s. Compared to the HIPC countries, the indebted Latin American countries had diversified exports, strong manufacturing bases and more skilled work forces. There is no evidence that their experience is relevant for poor, war torn economies."
Second, part of the windfall also originated from the of debt due by Mozambique to the African Development Fund and the World Bank's IDA. Neither of these organisations have the resources to grant relief on their own but the relief was funded by the HIPC Trust Fund.
The third factor, as stated by Hanlon is that "the unexpectedly generous deal is also a reaction to public pressure from the Mozambican and British governments, the Mozambique Debt Group, and the Jubilee 2000. …