Mozambique

Debt Sustainability Analysis

  

March 2010 

IMF and World Bank

Nicholas Staines Antonio NuciforaIMF, African Department World Bank, Africa Region+1-202-623-4431 +258 21482371nstaines@imf.org anucifora@worldbank.org

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OutlineThe Government has expressed interest in foreign borrowing on non-concessional terms to finance investment.This presentation shows the results of a preliminary Debt Sustainability Analysis (DSA) for Mozambique. A baseline scenario based on the current

macroeconomic and external borrowing projections.

A scenario with a sustained scaling-up of borrowing, illustrating the key issues and risks of non-concessional borrowing (NCB).

A scenario with a temporary scaling-up.Highlights that debt sustainability depends on

the selection of good investment projects and the borrowing terms.

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What is a DSA?The DSA is a tool to assess whether a

country’s borrowing plans are viable.It compares debt trajectories to ‘sustainable

ceilings’ in debt indicators (based on the capacity to make repayments).

The analysis is based on data and assumptions about: macroeconomic outlook;existing debt stocks and projections for new

borrowing;assumptions about debt relief, new borrowing

terms, and investment-growth relationship;The following scenarios are purely illustrative

and to be viewed cautiously—they are not projections.

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Ceilings and Indicators in 2008

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Mozambique: DSA Ceilings and Indicators at end-2008Indicator Ceiling Mozambique

NPV, percent of GDP 40 12.6NPV, percent of fiscal revenues 240 78.8NPV, percent of exports G&S 150 37.8 External debt service, percent of GDP None 0.5External debt service, percent of fiscal revenues 30 2.9External debt service, percent of exports G&S 20 1.4 Nominal Public External Debt Stock, US$m 3,243Nominal Public External Debt Stock, percent of GDP 33.6NPV of Public External Debt Stock, US$m 1,229NPV of Public External Debt Stock, percent of GDP 12.7

Sources: Mozambican authorities and Fund and Bank staff estimates

A. Baseline

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Macroeconomic FrameworkNo new NCB beyond the Portuguese Credit Line

(PTL).Projections assume real GDP growth around 6.5%.Inflation remains steady between 5% and 6%.The real exchange rate remains stable.Current account balance improves relative to GDP,

as trade and income balances strengthen.Net aid resources decline as a share of GDP and its

composition shifts towards borrowing.Projections assume an increased fiscal reliance on

domestic resources relative to GDP: (i) rising domestic revenue effort, stabilizing around 21% of

GDP (ii) gradual decline in primary domestic deficit by about 2% of

GDP(iii) modest use of domestic financing rising to about 1% each

year

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Baseline Key Results External public debt:Mozambique continues to face a low risk of external

debt distress.The NPV and debt service ratios on external public

debt are all well below their respective thresholds.

Portuguese credit lines (PTL) :The PTL deteriorates the NPV and debt service

ratios through the medium term.

Central government domestic debt:Central government domestic debt indicators also

projected to remain low.7

External Debt Indicators

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10

15

20

25

30

35

40

2008 2013 2018 2023 2028

NPV of Public External DebtPercent of GDP

Central Government + PTL

Central Government

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2013 2018 2023 2028

Public External Debt ServicePercent of GDP

Central Government + PTL

Central Government

Fiscal Indicators

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-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.02008 2013 2018 2023 2028

Central Government Primary Domestic BalancePercent of GDP

0

1

2

3

4

5

6

7

8

9

10

2008 2013 2018 2023 2028

Central Government Domestic DebtPercent of GDP

B. Sustained Scaling-Up

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AssumptionsAssumes sustained external NCB of 2.5% of GDP

per year above baseline.

Assumption of the growth impact of investments: increasing grant- financed investment by one percent of GDP raises growth by 1/3 percentage points.

All borrowing through the budget. Compare borrowing on concessional (CB) and on non-concessional terms (NCB).

Borrowing terms: CB: Highly concessional borrowing IDA terms (10 years

grace, 40 years maturity, at 0.75% interest). NCB: highly non-concessional commercial terms (NCB, 1

year grace, 10 years maturity, 9% interest).CB terms ‘cheap’ relative to growth impact, NCB

terms ‘expensive’ relative to growth impact.11

Impact on WelfareHigh-return investments

seem valuable as the sum (NPV) of the output gains exceeds the borrowing costs.

Additional GDP more than covers debt service (but less so for NCB).

The problem is: who receives the benefits and pays the debt service costs?

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0

2

4

6

8

10

12

14

16

18

20

2010 2015 2020 2025 2030

Incremental GDP and Debt Servicewith Concessional Borrowing

Percent of Baseline GDP

Incremental GDP

Incremental Debt Service

0

2

4

6

8

10

12

14

16

18

20

2010 2015 2020 2025 2030

Incremental GDP and Debt Servicewith Non-Concessional Borrowing

Percent of Baseline GDP

Incremental GDP

Incremental Debt Service

Impact on Budget FinancingThe investment affects the budget financing needs: it generates additional revenues (user charges or general taxes) but also additional debt service costs.Concessional Borrowing requires less financing. Allows less

borrowing or a larger primary domestic deficit (reduce revenues/raise spending). It generates fiscal space. This boosts private sector activity and growth.

Non-Concessional Borrowing requires more financing. Requires more borrowing or a smaller primary domestic deficit (raise revenues/reduce spending). This reduces private sector activity and growth.

Focusing on NCB, how can this higher financing need be met?

13-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2010 2015 2020 2025 2030

Additional Government Financing RequirementsDebt Service Less Incremental Tax Revenues

Percent of Baseline GDP

Concessional Borrowing

Non-Concessional Borrowing

(a) By Higher Domestic Borrowing

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Meeting additional financing requirements of NCB with domestic borrowing:Negative impact on growth.Raises NPV of external debt

close to the GDP threshold. External debt sustainability

vulnerable to shocks (exceed ceilings).

Results in large increase in domestic debt and interest costs.

Danger of a domestic debt spiral

0

5

10

15

20

25

30

35

40

2010 2015 2020 2025 2030

NPV External DebtPercent of GDP

Baseline

NCB

0

5

10

15

20

25

30

35

40

2010 2015 2020 2025 2030

Domestic DebtPercent of GDP

Baseline

NCB

(b) By More External Borrowing

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Meeting additional financing requirements of NCB with more external borrowing:Raises NPV of external

debt above the GDP threshold.

And requires a large contraction in the non-interest current account balance. This would need a large FX depreciation.

Would threaten external stability.

-16

-14

-12

-10

-8

-6

-4

-2

02010 2015 2020 2025 2030

Non-Interest Current Account, Percent of GDP

Baseline

NCB

0

5

10

15

20

25

30

35

40

45

2010 2015 2020 2025 2030

NPV of External DebtPercent of GDP

Baseline

NCB

Ceiling

(c) By Reducing Primary Domestic Deficit

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Meeting additional financing requirements of NCB by reducing the primary domestic deficit:Negative impact on growth

(as either revenues are raised or other spending reduced).

Raises NPV of external debt close to GDP threshold. External debt sustainability vulnerable to shocks.

Requires a large reduction in the primary domestic deficit of about 1.7% of GDP.

Unlikely to be feasible.

0

5

10

15

20

25

30

35

40

2010 2015 2020 2025 2030

NPV of External DebtPercent of GDP

Baseline

NCB

-6

-5

-4

-3

-2

-1

02010 2015 2020 2025 2030

Primary Domestic BalancePercent of GDP

Baseline

NCB

C. Sensivivity

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Less Severe Borrowing Terms

Moderate borrowing terms, say NCB with 4% (instead of 9%) interest:Significantly improves

the external debt indicators and room for borrowing.

Allows a smaller contraction of the primary domestic balance.

Highlights key importance of accessing better borrowing terms.

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0

5

10

15

20

25

30

35

40

2010 2015 2020 2025 2030

NPV of External DebtPercent of GDP

NCB Medium Terms NCB Baseline

-6

-5

-4

-3

-2

-1

02010 2015 2020 2025 2030

Primary Domestic BalancePercent of GDP

NCB Medium Terms NCB Baseline

Higher Growth ImpactSimulate higher growth impact of investments at 0.8 percentage points (instead of 0.35): Improves external debt

indicators Allows large expansion of the

primary domestic deficitHighlights key role of:

Quality of public investment and its selection process.

Good business environment to enhance crowding-in effect of public investment.

The opposite also holds: the unproductive use of resources will have a large adverse impact.

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0

5

10

15

20

25

30

35

40

2010 2015 2020 2025 2030

NPV of External DebtPercent of GDP

NCB High Growth NCB Baseline

-6

-5

-4

-3

-2

-1

02010 2015 2020 2025 2030

Primary Domestic BalancePercent of GDP

NCB High Growth NCB Baseline

D. Temporary Scaling-Up

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A Cautious ApproachA sustained scaling-up of investment financed by non-concessional borrowing poses large risks. In view of these risks, a more cautious approach may be warranted:

Assumes a temporary scaling-up of borrowing on NCB terms by 2.5% of GDP (approx. $300m) each year during 2011-2015.

This would deteriorate the debt indicators, but leave scope for adjustment.

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External Debt Indicators

22

10

15

20

25

30

35

40

2008 2013 2018 2023 2028

NPV of Public External DebtPercent of GDP

Public SectorCentral GovernmentCentral Gvt, ex NCB

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2013 2018 2023 2028

Public External Debt ServicePercent of GDP

Public SectorCentral GovernmentCentral Gvt, ex NCB

Conclusions

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High RisksThough the scenarios are only illustrative, some key points emerge:A sustained scaling-up of infrastructure

investment financed by foreign borrowing on commercial terms poses many risks. Costly foreign borrowing can generate a vicious

domestic debt cycle, external instability, or require a large fiscal adjustment.

A sustained increase in borrowing will make Mozambique’s debt sustainability vulnerable to shocks.

Investments should preferably be financed by reducing the primary domestic deficit (raising revenues or reducing non-priority spending). 24

Key Issues and Way ForwardThe impact of high sustained NCB will depend

on: The borrowing terms. The productive use of investments to raise growth.The promptness of fiscal adjustment to maintain

domestic and external debt sustainability.The presumption should be for caution in case

the resources are not used productively.A cautious approach would be to scale up

investment temporarily for priority projects with high growth impact.

If investments are highly productive and increase the growth rate, then more borrowing will become possible.

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Thank You

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