Document of The World Bank FOR OFFICIAL USE ONLY Report No. P7231-MOZ REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF MOZAMBIQUE UNDER THE HIPC DEBT INITIATIVE March 31, 1998 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Metical (MT) EXCHANGE RATE US$1.00 = 11,605 MT (March 30, 1998) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CFM Caminhos de Ferro de Mofarnbique (state ports and railways) DSA Debt SustainabilityAnalysis ESW Economic and Sector Work GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IDA International Development Association IMF International Monetary Fund NPV Net Present Value PETROMOC Empresa Nacional Petr6leos de Mo9ambique (state oil company) PFP Policy Framework Paper VAT Value Added Tax FISCAL YEAR January 1 to December 31 Vice President Callisto Madavo Director Phyllis Pomerantz Manager, HIPC Unit Axel Van Trotsenburg Staff Members Rocio Castro/Marc Stephens FOR OFFICIAL USE ONLY ASSISTANCE TO THE REPUBLIC OF MOZAMBIQUE UNDER THE HEAVILY INDEBTED POOR COUNTRIES DEBT INITIATIVE Table of Contents Page PROPOSED DEBT RELIEF................................................................... 1 INTERIM MEASURES ................................................................. 2 COMPLETION POINT MEASURES................................................................. 3 IMPACTOF INTERIM AND COMPLETION POINT MEASURES. 4 ...................................................... IDA ASSISTANCE STRATEGY................................................................... 5 THE PROPOSED STRUCTURAL AND SOCIAL DEVELOPMENT PERFORMANCE CRITERIA .................................................................. 6 OBJECTIVE OF THE PROPOSED ASSISTANCE .................................................................. 6 PROPOSED MONITORING CRITERIA................................................................... 6 RECO MMENDATION .................................................................. 8 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF MOZAMBIQUE UNDER THE HIPC DEBT INITIATIVE 1. I submitfor your approvalthe followingMemorandum and Recommendation on the assistanceto be providedto Mozambique under the HeavilyIndebtedPoor Countries (HIPC)Debt Initiativein respect of debt owed by it to the InternationalDevelopment Association(IDA). ThisMemorandum and Recommendation addresses: (i) the assistance to be providedby IDA duringthe interimperiod;(ii) the relief that is proposedto be providedin respect of debt owed to IDA at the completionpoint; and (iii) the structural and socialdevelopment performancecriteriathat Mozambique would need to have satisfiedat the completionpointin order for the assistanceunder the HIPCDebt Initiative to be providedat that time. *2. This documentis accompanied by a paperentitled" Mozambique: FinalDocument on the Initiativefor HeavilyIndebtedPoor Countries(HIPC)". The finalHIPC Document reports on consultations with creditorsregardingtheir envisageddebt reliefand provides an update of the debt sustainability jointlypreparedby the Mozambican analysis authoritiesand Bank andFund staff. It also containsrecommendations on: (i) Mozambique'seligibility for assistanceunder the HIPCDebt Initiative;(ii)the timingof the decisionpoint andthe completionpoint; (iii) the target for the net present value (NPV) of debt-to-exportratio at the completionpoint;(iv) the proposedactionsby multilateral creditorsto achievethe targetedNPV of debt-to-exportsratio at the completionpoint; and (v) the key performance criteriafor Mozambique under the Initiativeat the completionpoint. It shouldbe noted that the FinalHIPCDocumentbuildson the Preliminary HIPCDocument(IDA/SecM97-407, 8/20/97)and shouldbe read in conjunction with that document. PROPOSED DEBT RELIEF 3. As set forth in the FinalHIPC Document,to bringMozambique'sNPV of debt-to- exportsratio to a target of 200 percentby the proposedcompletiondate of June 1999,the multilateralcreditors' proportionalshare of debt relieffor Mozambique would amountto US$526millionin NPV terms, or 62.9 percentof multilateral debt at the decisionpoint, of whichUS$295 millionwould be providedon debt owed to IDA. Basedon proportional burden sharing,the bilaterals'share of reliefwould amountto US$916millionin NPV terms. As describedin the FinalHIPC Document,bilateralcommitments fall short of this requiredreliefby approximately US$116million. Thisgap is expectedto be filledthrough voluntarycontributions; a FinancingPlan willbe distributedto ExecutiveDirectorsprior to the Board discussionof the FinalHEPC Document. It is proposedthat the Executive Directorsapprovein principle,subjectto confirmation by other multilateralcreditorsthat they will provideproportionalreliefon their claims,the following: 2 (a) the provision of relief in an amount having a net present value of US$295 millionin respect of debt owed by Mozambique to IDA; and (b) on a voluntary basis, an exceptional, additional contribution of about US$29 million in NPV terms, to be provided in the context of an overall effort by other multilateral and bilateral creditors, as further detailed in the forthcoming Financing Plan, to fill the above mentioned shortfall of US$116 million. Relief on debt owed to IDA would be provided through actions during the interim period and at the completion point, while the additional relief would be provided through actions during the interim period. Interim Measures 4. During the Board discussion of the Preliminary Document in September 1997, Executive Directors supported the use of interim measures during the period between the decision and the completion points to ease the debt burden. Management is proposing that Mozambique receive up to 75 percent of its IDA program funding in the form of grants during the interim period, since the projected NPV debt-to-exports ratio at the proposed completion point of June 1999 would be above 350 percent. These grants would amount to US$183 million (or US$61 million relief in NPV terms). 5. Management is also proposing to provide the exceptional debt relief referred to in paragraph 3(b) through measures during the interim period. These measures would include providing the remaining portion of the IDA lending program during the interim period in the form of grants. As a result, it is expected that 100 percent of the IDA program between the decision and completion points (lending of about US$270 million consistent with the base case of US$480 millionenvisaged in the most recent Country Assistance Strategy) could be provided as grants and that IDA's voluntary contribution would be delivered as shown in Table 1. 3 Table 1. Indicative IDA Grant Funding in the Interim Period (millionsof US$, unless otherwise specified) In NPV terms In Nominal Terms Relief under Proportional 61 183 Burden Sharing 1/ Additional Relief 2/ 29 87 Total Base Case Program 90 270 1/ IDA's contributionunder the HIPCframework, underwhich up to 75 percent of the lendingprogramin the interimperiod couldbe deliveredin grants(see "WorldBank Participation in the HeavilyIndebtedPoor Countries' Debt Initiative,"SecM96-926, August26, 1996). 2/ Corresponding to the additionalcontributiondiscussedin paragraph3(b). In addition IDA, together with other possible donors, could help finance a second commercial debt buy-back, through a grant from the IDA Debt Reduction Facility, to reduce debts not covered under the 1991 operation. 1 Any relief from this would be over and above IDA's voluntary, additional contribution. 6. Approval by the Executive Directors of the provision of IDA grants for a specific project will be sought at the time the Executive Directors are requested to approve IDA funding for the project. The NPV reduction resulting from such grants (compared with the credits they replace) would provide debt relief to Mozambique equivalent to US$90 million (in NPV terms). If the level of IDA funding during the interim period falls short of the amount envisaged under the base case scenario, Management recommends that the remainder of the assistance be provided through the further purchase of debt owed to IDA through the HIPC Trust Fund. Completion Point Measures 7. The HIPC Trust Fund will set aside at the decision point the necessary resources, after taking into account the debt relief provided during the interim period, to provide the required relief on debt owed to IDA at the completion point. This will be equivalent to about US$234 million in NPV terms. With these resources, the Trust Fund is expected, at the completion point, to purchase IDA credits with a nominal value to be determined on the basis of the principles agreed upon for calculating the NPV of debt in DSAs and by selecting for purchase the oldest IDA credits. 2 These IDA credits, amounting to approximately US$512 million in nominal terms, will be purchased by the HIPC Trust Fund and then canceled, and the Mozambican authorities will be informed that the debt is no longer due. See "Memorandum and Recommendation of the President of the International Development Association to the Executive Directors on a Proposed Grant from the Debt Reduction Facility to the Bank of Mozambique," IDA-R91-81, May 30, 1991. 2 The principles for the calculation were described in detail in "The HIPC Debt Initiative- Elaboration of Key Features and Possible Procedural Steps," SecM96-927, August 26, 1996, page 11. 4 Table 2. Total Relief DeliveredDuringInterimPefiod andat CompletionPoint (millionsof US$, in NPV terms) InterimPeriod Point Completion Total Relief UnderProportional 61 234 295 Burden Sharing AdditionalRelief 29 - 29 Total 90 234 324 Impact of Interim and Completion Point Measures 8. Table 2 shows total relief from IDA resulting from interim and completion point measures and amounting to up to US$324 million (of which about US$29 million would be the additional, voluntary assistance). Total relief would thus be equivalent to a reduction in debt to IDA at end-1998 from a projected US$539 million in NPV terms before relief to some US$215 million after relief and from US$1,309 million to about US$527 million in nominal terms (see Chart 1). Chart1 -Impactof Relief on End-1998IDADebt (millionsof US$) 1/ 1,400 1,200 1,000 82 800 - ~~~~~~~~~~~~~~*Total relief :'-ji3i3,?i3 '.3;gj. i'3' 3'33'" -"''''ig .:i'. ............................... 600 ElDebtafter Relief 400 2._ NPV Nominal 1/ Includes both interim and completion point measures and about US$29 million NPV (approximately US$87 million nominal) in additionalvoluntary relief. 9. Total savings in debt service resulting from interim and completion point measures would amount to about US$880 millionin nominal terms, including about US$578 million from the purchase of credits at the completion point. As illustrated in Chart 2, delivery of IDA's assistance as described above would result in a frontloaded profile of debt service reduction, with a 74 percent reduction in debt service in the year 2000 falling to about 29 percent by the end of the projection period. 5 Chart2 - Frontloaded Delivery of IDADebt Relief: PercentageReductionin IDADebt Service Due 1/ 80 % 0 60- 60 -~~ 50 -A 40~~~~~~~~~~~ 30 20- 10 0- 0'. 00 0 C ' . 00 cl C1 N N cl C1 4 cl N Year 1/ Includessavingsfrom interim as wellas completionpoint measures. Assumesthat the HIPCTrust Fund wouldpurchaseoldest IDA creditsat the completionpoint. IDA ASSISTANCE STRATEGY 10. Since 1987, Mozambique has implemented a wide range of economic reforms with the support of IDA, the IMF, and other bilateral and multilateral donors. The reforms have aimed at reversing the substantial economic decline of the early 1980s, through a shift toward market oriented policies and a sharp reduction in the size of the public sector. The sustained reform effort, the return to peace in 1992, and substantial external donor assistance have led to strong economic growth and a substantial decline in inflation. In 1997, real GDP growth was 8 percent and inflation dropped to 5.8 percent, the lowest since Mozambique's independence in 1975. 11. The Bank's latest Country Assistance Strategy (CAS) for Mozambique was discussed by the Board in December 1997. The CAS supports the Government's program for poverty reduction through sustainable economic growth, emphasizing support to rural areas where most of the poor live. The strategic priorities of the CAS are fully consonant with the development objectives of the HIPC Initiative. These include: (i) promoting rapid, broad-based private sector-led growth -- by supporting the macroeconomic reform agenda, supporting high potential growth sectors, creating a "business-friendly environmnent", and improving environmental management and assessment; (ii) building capacity and developing human resources -- by increasing Mozambican participation in the private sector, supporting public sector reform and decentralization, and increasing the coverage and quality of health and education services; and (iii) strengthening development partnerships -- by reinforcing the Bank Group/Government partnership, forging closer links with other aid partners, strengthening ties with civil society -- including non- governmental organizations and the private sector -- promoting regional partnerships, and ensuring coordination within the Bank Group. Within these priorities, developing human 6 resources is receiving special attention in the Government's and Bank's efforts to reduce poverty. In coordination with other participating donors, the Bank is supporting the preparation and implementation of sector expenditure programs in health and education. 12. The CAS objectives will be supported through the implementation of the current portfolio, new financing of about US$480 million during FY98-00 under the base case scenario, analytical work, aid coordination, policy advice, and technical support. Portfolio performance has improved significantly,reflecting a comprehensive restructuring undertaken jointly with the Government throughout 1997. The proposed new IDA financing is expected to be directed mostly toward investments in agricultural and rural development, education, and infrastructure. Economic and sector work (ESW) will provide the analytical underpinnings for the Bank's program. Two major studies, a Growth Prospects Paper and a Fiscal Management Review, are expected to assist the Government in formulating a medium term development strategy consistent with the changing realities now facing Mozambique. Other studies are aimed at assisting in the development of sector strategies. As part of the proposed assistance to be provided to Mozambique under the HIPC Initiative, IDA will continue to monitor progress made under the Initiative in conjunction with the IMF during the next eighteen months. TEHEPROPOSED STRUCTURAL AND SOCIAL DEVELOPMENT PERFORMANCE CRITERIA Objective of the Proposed Assistance 13. With the proposed assistance, IDA would support the implementation of the Government's economic and social program for poverty reduction as spelled out in the Policy Framework Paper (PFP) for the period 1997-99. IDA's assistance, in conjunction with that of other creditors, would allow Mozambique to reach a sustainable debt position at the completion point. Proposed Monitoring Criteria 14. The delivery of debt relief at the completion point would be contingent on the successful implementation of the monitorable actions specified in the final HIPC document. Before reaching the completion point, the Government would need to make satisfactory progress in the areas of structural reform, social sector reform, and poverty reduction. 15. Structural Reforms. The Government would implement the policy measures detailed in Table 5 of the final HIPC document. A main focus of the reform agenda during the 1998-99 period will be on privatization, public enterprise reform, and fiscal reform. Progress on the implementation of these reforms would be monitored under IDA and IMF-supported programs. Key reforms to be implemented by mid-1999 include: 7 * completingthe privatizationprogramfor publicenterprises; * concessioning of Caminhosde Ferro de MoXambique (CFM)--state ports and railways--to privateoperators; * privatizingthe managementof the five majorurban water companies; * establishing to take over the oil importing a companywith privatesector participation functionof the EmpresaNacionalPetr6leosde Mogambique(PETROMOC)--state oil company;and * introducinga Value AddedTax (VAT). 16. Social Sector Reforms. The Government would undertakemeasuresin the social sectors aimedat improving the healthand educational status of the Mozambican population. Thesemeasureswillbe implemented and monitoredunder sector expenditure programssupportedby IDA and other donors. Both the ongoingHealth Sector Recovery Program(in place since 1995)andthe plannedEducationSector Program(under preparationfor approvalin late 1998)aim at substantially improvingthe qualityand coverageof socialservices,especially in the areas of primaryeducationand primaryhealth care. Assistancedeliveredunder the HIPC Initiative-- both generalbudgetaryrelief resultingfromthe Initiativeas well as IDA's interimreliefthrough grant financing of the EducationSector Program-- will supportnot onlythe expansionof socialsector but also reinforcethe sustainability infrastructure, of recurrentcost financingassociated with the expansion. 17. The Government'soverallobjective is to improvesocialindicatorsto at least matchthe averageamongSub-Saharan Africancountriesby the turn of the century. Specificmeasuresand monitorable targetsthroughthe year 2000 are detailedin Appendix Table 5 of the finalHIPC document. Key measuresandtargets 3 to be achievedby mid- 1999include: In Education Measures: * approvingan integratedsector expenditureprogramfor education,in coordination with participatingdonors; * ensuringthat teacher trainingkeeps pacewith recruitment; * establishingsystematic monitoringof internallyand externallyfinancedexpenditures; and * raisingthe share of educationin the recurrentbudget in linewith the MediumTerm ExpenditureFramework. Targets: increasethe primarygross admission rate (75 percent in 1996)by 2-3 percentage points a year; increasethe numberof primaryschoolteachersby about 10 percent a year; maintainthe availability of textbooks to one per pupil;increaseprimarycompletionrates by at least one percentagepoint a year (6 percentin 1996). 3 Basedon mediumterm targetsfor the year 2000. 8 In Health Measures: * undertaking a comprehensive review of the ongoing Health Sector Recovery Program, in coordination with participating donors; * improving the supply of essential drugs and trained staff at first level facilities; * establishing systematic monitoring of internally and externally financed expenditures; and * raising the share of health in the recurrent budget in line with the Medium Term Expenditure Framework. Targets: increase in vaccination coverage of DPT(3)4 to 60-65 percent (from 58 percent in 1996); increase in the proportion of health posts/centers stocked with the Essential Drug Kits from 40 to over 50 percent; increase in the proportion of health posts/centers staffed with trained personnel from 70 percent to over 80 percent. 18. Poverty Reduction. The Government would also aim at improving the statistical information on the poor, including completing the first comprehensivePoverty Assessment for Mozambique, as well as developing an Action Plan designed inter alia to improve the targeting of social programs to the most vulnerable groups. This would be monitored in parallel with the ongoing and new activities in the social sectors. RECOMMENDATION 19. Once Mozambique's other creditors have confirmed their agreement to provide the debt relief envisioned in the final HIPC document, the Executive Directors will be so informed and confirmation will be sought, on a no-objection basis, of the actions approved in principle at this time. Following this confirmation, IDA would enter into a legal agreement with Mozambique for the provision of the agreed relief on debt owed to IDA, subject to Mozambique's fulfillingthe conditions approved by the Executive Directors. 20. I recommend that the Executive Directors approve, in principle, the recommendation contained in the Final HIPC Document concerning the eligibilityof Mozambique for assistance under the HIPC Debt Initiative, the decision point, the completion point, the NPV of debt-to-export ratio to be achieved at the completion point, the proposed actions by multilateral creditors to achieve these targets, and the performance criteria to be met by Mozambique. 21. I further recommend that the Executive Directors approve, in principle, the recommendations contained in this paper on the amount and manner of debt relief to be provided in respect of debts owed by Mozambique to IDA. In particular, I recommend 4 pertussis, Diphtheria, and tetanus. 9 that ExecutiveDirectors approvethe NPV debt reductionon IDA debt through the H[PC Trust Fund, the levelof IDA grants providedas interimdebt relief,the additional, voluntarycontributionreferredto in paragraph3(b), and the structuraland social development performance conditionsthat Mozambique would be requiredto satisfyat the completionpointin order to receivedebt reliefunder the HIPCDebt Initiative. JamesD. Wolfensohn President By: Sven Sandstrom D.C. Washington, March31, 1998