Mozambique President backs Jubilee 2000 while South Africa cancels Mozambique's debt; but Mozambique HIPC problems continue

In his state of the nation address to parliament on 29 March, Mozambique's President Joaquim Chissano said that "even with the reduction scheduled under HIPC, our debt service will continue to be heavy, absorbing 12 per cent to 18 per cent of government income. We hope that the international community will come to realise that the poorest countries cannot develop their potential without total debt cancellation within the framework of Jubilee 2000."

This is probably the first time that a president in a state of the nation address has cited Jubilee 2000.

South Africa heard the appeal, and on 12 April Finance Minister Trevor Manuel said that South Africa would cancel Mozambique's debt of about Rand 40 million ($6.5 mn). Manuel said South Africa would continue to take the lead in pushing for international debt relief.

South Africa has already cancelled the Rand 1 Billion debt owed to it by Namibia. When South Africa was ruled by the white "apartheid" government, it occupied Namibia and attacked Mozambique. Thus its unilateral cancellation of these debts reflects the realisation of the Nelson Mandela government that these debts and immoral or odious and repayment should not be demanded.

But problems continue for Mozambique

Debt relief for Mozambique under the World Bank/IMF Heavily Indebted Poor Countries (HIPC) Initiative was agreed on 8 April 1998 (the so-called "decision point"). Mozambique now hopes for a HIPC "completion point", when the debt is actually cancelled, of 1 July, following World Bank and IMF board meetings in early June.

But the HIPC deal is already being attacked as inadequate by the government, which is calling for total cancellation. And there are fears that completion point might be delayed because Mozambique has not met two of the critical conditions set by the Bank and Fund.

Under HIPC, Mozambique's debt service payments will fall from $113 mn per year to $100 mn per year, but this is triple the government's current expenditure on health, according to the most recent Ministry of Health figures.

But even this reduction may be delayed, because Mozambique has failed to meet two conditions set as part of the decision on 8 April 1998 to grant debt relief. One required that a programme be in place to ensure that income from health service user charges would increase five-fold by 2000. The other required the introduction of Value Added Tax by 1 April 1999. An IMF team is expected in Maputo in late April and there will be some hard negotiations.

Officially, the Ministry of Health refuses to discuss the issue, but privately they say they hope to convince the IMF to accept a plan that involves a doubling of charges and improved systems to collect those charges (which in some cases go directly into the pockets of health workers whose salaries remain below the poverty line, as a result of other IMF conditions).

Health Ministry officials argue that the charges will remain very low, at less than $1 in most cases and that anyone with a wage or cash income will still be able to afford them. They admit that more of the poorest will be excluded from health care, but feel they must accept this as the price the IMF demands for debt relief. Their only hope is that they can convince the IMF to allow them to keep the increase below that set last year as a condition of HIPC. Official United Nations figures show that two-thirds of Mozambicans live below the absolute poverty line of $1 per day.

Meanwhile, Mozambique has been forced to rush implementation of a major change to the tax system because it is a condition of HIPC debt relief, Planning and Finance Minister Tomaz Salomao told the Mozambican parliament on Thursday 25 March.

A condition of HIPC was that Mozambique introduce value added tax (VAT) by 1 April. With just a week to go before the deadline, Salomao went to parliament to admit that neither the government nor the business community was ready, and that the start date would be delayed to 1 June.

The business community and many members of parliament had appealed for more time, until 1 January. On 1 April, the Confederation of Mozambican Economic Associations again called for a delay to 1 January.

But Salomao told parliament that since VAT was a condition of HIPC imposed by the international community, it must be in place before Mozambique's debt relief is considered by the boards of the World Bank and IMF in June.

Until now, Mozambique has used sales taxes that were paid by both wholesalers and retailers. Mozambique had wanted to shift to a simpler system of taxes paid mainly by wholesalers, but the International Monetary Fund insisted that Mozambique adopt VAT instead.

The business and donor communities opposed this because it is a complex tax requiring an advanced level of accounting. Many small businesses in Mozambique are run by people who are only semi-literate and who will not be able to meet the bookkeeping requirements. The widely predicted result is that even more business people will shift to the parallel market and not pay any taxes at all, and that this will also increase bribery and corruption.

The government's proposed simplified tax, agreed with the business community, was intended to bring more small traders into the tax system and reduce illegality. But the IMF, which is obsessed with imposing VAT throughout Africa, rejected it.

South Africa recently admitted it was having major problems with VAT and faced millions of dollars in fraud. Mozambique's tax administration is much less sophisticated than that in neighbouring South Africa.

Mozambique repeatedly delayed the introduction of VAT, so the IMF included implementing VAT by 1 April 1999 as a condition when Mozambique was given preliminary approval ("decision point") for HIPC debt relief by the IMF and World Bank boards on 8 April 1998.

But less than a year proved to be not enough time to get ready.

Confusion, increased corruption, and a rise in black-market trading is being predicted by Mozambican business journalists such as Carlos Cardoso, editor of the daily "Metical", who take this as evidence that IMF and World Bank claims to oppose corruption are just rhetoric.

Increasingly, Mozambicans see HIPC as a bad deal. It is conditional on reducing health care to the poor and increasing corruption in the tax system, yet it provides little real debt relief.