Press Release No. 00/28

Press Release: Mozambique Qualifies for an Additional US$600 Million in Debt Relief under the Enhanced HIPC Initiative, Bringing Mozambique Total Debt Reduction under the Initiative to US$4.3 Billion

April 12, 2000

The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for Mozambique under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total relief from all of Mozambique's creditors under the enhanced framework equals US$600 million, or US$254 million in net present value terms (NPV). This new amount is in addition to relief committed under the original Initiative, worth US$3.7 billion. In total, this is equivalent to about 72 percent of the NPV of total debt outstanding at end-1998 after the full use of traditional debt relief mechanisms.

The IMF and IDA have delivered their full share of assistance under the original HIPC Initiative, and will start providing the additional debt relief under the enhanced HIPC Initiative effective immediately as interim relief. The additional assistance committed by the IMF under the enhanced Initiative amounts to US$19 million, including US$3 million in interim relief. This is in addition to US$152 million of assistance delivered under the original Initiative. IDA's assistance under the enhanced Initiative amounts to US$67 million, of which close to US$10 million in interim relief. Combined with about US$975 million of assistance under the original Initiative, IDA is delivering to Mozambique over US$1 billion in nominal debt service relief.

In response to the emergency brought on by the recent floods, both the World Bank and the IMF decided to accelerate the debt relief by forgiving 100 percent of the debt service owed by Mozambique in the next 12 months, so that Mozambique will not have to pay any debt service to either institution during this period. The Paris Club also granted a deferral of debt service until Mozambique reaches its completion point under the enhanced HIPC Initiative, which would be followed by a debt reduction under Cologne terms at the completion point. Several Paris Club creditor countries also announced their intention to provide voluntary forgiveness of debt in addition to the HIPC Initiative assistance.

Mozambique has received the bulk of the assistance under the original HIPC Initiative at the completion point reached in June 1999, and has started to receive interim assistance under the enhanced HIPC Initiative immediately after the decision point. Mozambique will receive the full amount of assistance under the enhanced HIPC initiative when it satisfies the requirements for a floating completion point, including adoption of a participatory poverty reduction strategy paper (see Annex).

ANNEX

1. Mozambique

Track record and poverty

Mozambique has made substantial progress in implementing economic reforms. During the past four years, average annual inflation came down from about 47 percent to 2 percent, while real GDP grew by almost 10 percent a year on average. Mozambique has also made a strong structural adjustment effort in recent years, including in the areas of fiscal management, governance and public administration, and private sector development. While Mozambique remains one of the poorest countries in the world, with 68 percent of the population living in poverty in 1996-1997, substantial improvements in social indicators have been recorded during the 1990s, most notably in rising school enrolment and falling infant mortality rate. There have also been improvements in household food security.

Requirements

The IMF and IDA had already committed to assisting Mozambique under the original HIPC Initiative (June 1999). The full assistance under the enhanced HIPC Initiative from both institutions will be delivered to Mozambique when action has been taken in following areas:

• Completion of a fully participatory poverty reduction strategy paper, which will need broad endorsement by the Boards of the IMF and the World Bank. For this purpose, the government is presently organizing a dialogue with civil society, which is expected to take place over the next twelve months. The document's objectives are summarized in the interim PRSP that will be published shortly.
• Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including in the areas of social development, public sector reform, and legal and regulatory framework.
• Maintenance of a stable macroeconomic environment, as evidenced by satisfactory performance under a program supported by an arrangement under the IMF's Poverty Reduction and Growth Facility.
• Confirmation of the participation of other creditors in the debt relief operation.

The HIPC Initiative was launched by the World Bank and the IMF 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 Initiative aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports and 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.

Thirty-six countries are expected to qualify for assistance under the enhanced HIPC Initiative, of which 29 are sub-Saharan African countries. As of early April 2000, five countries had reached their decision points under the enhanced framework (Bolivia, Mauritania, Mozambique, Tanzania and Uganda), with total committed assistance estimated at US$12.7 billion, representing an average stock-of-debt reduction of more than 50 percent on top of traditional debt relief mechanisms. In addition, three countries had reached their decision points under the original framework (Burkina Faso, Côte d'Ivoire, and Mali), while Guyana had already reached its completion point. Total assistance under the HIPC Initiative committed to these four countries amounted to US$1.7 billion. However, these countries are eligible for additional assistance under the enhanced Initiative.

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