The Government of Mozambique and the Paris Club have reached an agreement to extend the moratorium on debt until June, allowing the country to postpone payments worth $250 million.
“The representatives of the Paris Club Creditor Countries have accepted to provide the Republic of Mozambique with an extension of the suspension of debt service from January 1 until June 30, 2021,” reads a note posted on the website of this group of official creditors.
The Debt Service Suspension Initiative (DSSI) was launched by the G20 in April last year and guaranteed a moratorium on debt payments of the most indebted countries to the most developed countries and multilateral financial institutions (official and bilateral debt), with an initial deadline of December 2020, which was then extended until June this year, with the possibility of a further extension of six months.
According to the latest World Bank data, published last week, the extension of the moratorium will allow a postponement of payments worth 250.2 million dollars, about 204.4 million euros.
“The Government of the Republic of Mozambique is committed to putting the resources released by this initiative into increased spending to mitigate the health, economic and social impact of the covid-19 crisis,” reads the text, which points out that the African country “is committed to seeking from all other official bilateral creditors a treatment of debt service in line with what has been agreed” with the Paris Club, the text points out.
This group of countries was formed in 1956 and is an informal group of official creditors whose role is to find sustainable and coordinated solutions to the payment difficulties that debtor countries go through, reads the website of this entity.
“The members of the Paris Club participating in this reorganization are the governments of Brazil, France, Japan, the Republic of Korea, Russia, and Spain,” the note states.
The DSSI does not require debtor countries to stop honoring financial commitments to private creditors, such as commercial banks or holders of sovereign debt securities, which is why Mozambique can benefit from this relief in payments and continue to service public debt, thus avoiding a downgrade by rating agencies.
The DSSI only suggests that countries seek debt relief from the private sector, while the Common Framework, approved by the G20 in November, argues that private creditors must be approached, although it does not say explicitly what happens if there is no agreement between debtor and creditor.
Ethiopia’s request to adhere to this framework in late January stirred investors, who saw the country as the first of several sub-Saharan African countries to request debt relief, which is also the view of the executive director of the United Nations Economic Commission for Africa (UNECA), who predicts that more countries will follow Chad, Zambia and Ethiopia’s example.
The proposal presented by the G20 and Paris Club in November is the second phase of the DSSI, launched in April, and which was widely criticized for not obliging the private sector to participate in the effort, since it would open the way for indebted countries not to pay official and bilateral creditors (countries and multilateral financial institutions) and to continue servicing private debt.
This Framework aims to bring all the debt actors on board, including China’s private and public banks, which have become the largest creditors of developing country governments, particularly those in Africa.
The moratorium on debt repayment was one of the instruments launched to bridge the financing gap of $345 billion (293 billion euros) by 2023 in Africa alone, according to IMF calculations.
So far, of the 73 countries eligible for DSSI, more than 40 have formally applied for membership, benefiting from potential savings of more than $5 billion, about four billion euros, according to the latest World Bank tally.
