Alessandro Rebucci: Mozambique's debt burden in historical perspective

[Alessandro Rebucci is no longer at the IMF. He was a Senior Economist in the World Economic Studies Division of the IMF Research Department till August 2008. Previously he was an economist in the Modeling Division of the Research Department and the Stand-by Operation Division of the Policy and Development and Review Department.]

In relation to the approaching Mozambican completion of the enhanced Initiative for Heavily Indebted Poor Countries (HIPC), Alessandro Rebucci of the International Monetary Foundation has analyzed the Mozambican debt burden in historical perspective. In an IMF study, Alessandro Rebucci asks why and how Mozambique accumulated unsustainable debt.
Attempting to answer this question, Alessandro Rebucci draws on three basic pieces of information; a chronology of the main political and economic events in the history of Mozambique since independence; an estimated balance of payments from 1973 to 1998; and an account of traditional debt-relief mechanisms.

Mozambique's external debt burden

The earliest official estimate of Mozambique's nominal stock of public gross external debt exists for 1984, putting the debt at about US$ 2.4 billion, more than ten times the total value of export of goods and services in that year, or 50 percent of GDP. In order to understand the causes of the sharp buildup of debt, a balance of payment table from 1973 to 1998 was compiled based on the IMF's background papers on recent economic developments (REDs) on Mozambique. A measure of the total nominal stock of net external debt was then obtained by cumulating net debt-creating balance of payments flows from 1975 onward.

A net rather than a gross concept of dept is usually analyzed when a country is known to have both assets and liabilities. While the precise figures are not known, this appears to have been Mozambique's position at the time of independence. More generally, other sources of balance of payments financing than external debt may have been used while the debt was building up, so that looking only at gross debt may lead to over- or underestimating the underlying imbalances. A set of internally consistent figures within a well-defined accounting framework should also be more reliable than the analysis of a single series in isolation.

Studying the constructed figure of nominal net external debt in percent of exports of goods and services and GDP, two important facts emerge. First, it was not until 1978-79 that Mozambique started to accumulate substantial amounts of external liabilities, as the drawdown of foreign reserves was sufficient to finance the current account deficit during the years immediately after independence. Second, while the nominal stock of net debt kept rising throughout the period considered, net debt in percent of exports of goods and services peaked as early as 1986-87, and in relation to GDP in 1993-94. Mozambique's debt burden, therefore, was accumulated primarily during the period 1978-93 - the period of civil war.

The civil war, however, may not have been the only cause of the rise in Mozambique's debt burden, and other demand and supply factors might have contributed to the buildup of debt. Brooks and others (1998) and Baltazar and Associates (1999), for instance, find that, in addition to political factors such as civil war and social strife, external (terms of trade and weather-related) shocks, lack of adjustment and reforms, and creditors' financing and refinancing policies all help explain the buildup of debt observed in many low-income developing countries over basically the same period. The next paragraphs analyze each of these potential explanatory factors, after a brief discussion of the initial conditions at the time of independence...

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