Impact of debt service on the provision of health services

Executive Summary

From 2010 to 2020, in Mozambique, the public debt increased exponentially, rising from 119.9 billion meticais in 2010 to about 948.7 billion meticais in 2020. In this period, the external debt represented about 80% of the debt stock. The contracting of the so-called “hidden debts” was responsible for the extrapolation of the limits of debt sustainability, as well as debt service. In fact, with the discovery of these illegal debts, the debt service reached 61% of revenues. Therefore, more than twice, the sustainability limit, 25%.  A scenario that compromises the allocation of necessary resources for the provision of essential public goods and services, including the health sector. For example, an application of, on average, 2.2% of the debt service could save the lives of about 171 thousand children, who die of chronic malnutrition every year in Mozambique. Whereas a large part of the population in Mozambique lives in poverty, especially in rural areas, where 68% of the population lives. Since only 55.4% of the population has access to basic health services, it is important to think about financing alternatives that do not increase the costs of access to these services for the majority of the population. 

It is necessary to engage different social actors to face this situation. In these terms, the government is recommended to strictly observe the budgetary rules, associated with contracting public debt, respecting the limits of debt sustainability, as well as adopting alternative ways of financing public expenditure so that the population can have access to health services. The parliament must pressure the government to respect the budgetary norms associated with contracting public debt, and reflect on alternative legal mechanisms to contain the growing and unsuitability of public debt. The Administrative Court must support initiatives leading to greater severity in the legal treatment of typical cases of corruption, caused by public officials. The donors are endorsed to make foreign aid, observing the transparency criteria, accountability in the contracting of public debt and improvement in the provision of public services.  Civil Society, at last, must monitor continuously the government’s work in debt contracting, demanding transparency and accountability in the management of public finances.

1.     Introduction

The provision of quality health services for everybody is a basic right and determent condition for the promotion of sustainable socioeconomic development. However, in developing countries like Mozambique, limited revenue collection capacity and inefficient revenue management make it difficult to provide essential public services. In fact, public debt has proven to be an instrument through which governments seek to finance public expenditure as an alternative. However, although public debt is an important instrument for financing public expenditure, its amortization and the associated costs (debt service) can compromise the medium- and long-term capacity to provide public goods and services to the population. Therefore, the decision to contract public debt must take into consideration its sustainability.

In Mozambique, public debt has increased about 8 times in the last 10 years (CGE 2010 to 2020) and the scandal of the so-called “hidden debts” was responsible for its exponential growth. Additionally, the discovery of this scandal led cooperation partners to suspend direct state budget support. As of 2014, the government began to contract more public debt with bilateral creditors instead of multilateral creditors (IMF, 2015 to 2020). This change means that debt service burden increased abruptly, with tendency to worsen the already deficient capacity to provide public goods and services to the population. Considering this, in recent years, the government has been witnessing the growth of competition from the private sector in the provision of public services, especially health and education. This scenario contributes to limiting access to public services to the great majority of the population that lives in conditions of extreme poverty and does not have resources to access the services offered by the private sector.

In this context, the Observatório Cidadão para Saúde (OCS), in partnership with the Budget Monitoring Forum (FMO), has been carrying out studies reflecting about public finances, taking into account the main development actors (government, parliament, cooperation partners, and civil society). The studies are also focused on the impacts of debt service on the provision of public services to the population, as well as discussing alternative ways of financing the health sector that do not make access to health services more expensive for the population.

1.1 Objectives

• The pursuit of these objective followed some strategic steps, namely:

• Analyze the evolution of public debt and its sustainability.

• Analyze the opportunity cost of debt service in the health area.

• Discuss financing options for the health sector.

1.2. Methodology

The analysis was based on a documentary review substantiated by observation of the main public planning and management instruments for the period 2010 to 2021. These documents include General State Account (2010-2020), Balance of the Economic and Social Plan (2019 and 2020) and State Budget (2021). Relevant documents from regional and international scenario were also used to strengthen the analysis, in particular the IMF reports.

The approaches were qualitative for non-quantifiable information and quantitative for numerical data. The method of interpretation and data analysis was descriptive statistics, using Excel to construct charts and statistical tables for different indicators. 

2. Main Findings

The main findings were divided into four subsections. The first is dedicated to the evolution of the total public debt, external and internal. The second subsection analyzes debt sustainability in relation to GDP and Total Revenues. The third subsection deals with the analysis of the impact of debt service in health sector. Finally, the fourth subsection deals with alternatives financing methods for the health sector.    

1.1 Mozambique’s Public Debt (2010-2020): Evolution, Structure and Sustainability

The hidden debts have, on the one hand, led donors to distrust Mozambique, reducting direct financing to the state budget and foreign aid. On the other hand, the debt service represents a high opportunity cost for the social sectors and the amounts involved would be sufficient to solve problems in various sectors, such as health, education and social protection.

While other expenditures can be interrupted relatively quickly when justified, public debts translate into medium and long term payment commitments, conditioning the growth of the budget allocation to priority sectors. Taking this into account, a deeper analysis of the social costs, associated with public indebtedness in Mozambique, is necessary and merits attention in the present analysis.

This scenario highly justifies the need for civil society intervention. However, this action must be based on the evidence that is intended to be generated methodically in this analysis, which begins with a description of the public debt, followed by a detailed presentation of the financing of the health sector, in order to estimate the opportunity cost of the public debt in this sector in terms of needs, which will make it possible to identify policy measures leading to alternative financing for the health sector as a way of mitigating the harmful impact of the debts.

This chapter describes the evolution of Mozambique’s public debt (total debt, external debt and internal debt) from 2010 to 2020, the composition of the external and internal debt, and its implications.

1.1.1 Composition of Total Public Debt (external and internal)

The analysis of the total public debt, over the last 11 years (2010 to 2020), increased almost eightfold, from 119.9 billion meticais to 948.7 billion meticais. Essentially, in this evolution, two important moments can be observed. The first moment goes from 2010 to 2016, when the “hidden debts” scandal was discovered. In this period, the debt grew exponentially, at an average annual rate of 23%. The second moment goes from 2017 to 2020, after the discovery of the hidden debts, where the debt evolved relatively “shy”, at an average annual rate of 3%.

Another important conclusion of this analysis is that, in this period, the external debt corresponded to about 80% of the total public debt. Regarding internal public debt, it should be noted that from 2015 it began to grow at a galloping rate, increasing from 432.2 billion (in 2015) to 701.7 billion meticais (2020).

Chart 1: Evolution of public debt in Mozambique(2010 – 2020)

Source: CGE (2010-2020)

1.1.1       External Public Debt Structure

In the period under review, the external debt was composed of bilateral and multilateral credits. Bilateral credits include predominantly creditors of the emerging countries block called BRICS (Brazil, Russia, India, China and South Africa). Regarding the evolution from 2010 to 2013, multilateral credits were higher than bilateral credits. However, from 2014 to 2020, the scenario changed, as debt with bilateral creditors began to evolve above multilateral credits, an average annual rate of 48% versus 16%, respectively. The consequence of this is that bilateral credits, unlike multilateral ones, have relatively high interest rates and short maturity periods (for example: the BRICS interest rates were twice as high as the interest rates of other creditors), the government assumes a high expenditure with debt service in the short and long term, which means compromising the provision of essential goods and services such as health. An crucial example to elucidate the argumentation, we mean that, in 2018, bilateral credits corresponded 38% of external debt but were responsible for another 45% of debt service, while multilateral credits corresponded 35% of external debt and only 14% of debt service (IMF, 2018). 

Chart 2: Structure of Mozambican External Debt (2010 – 2020)

1.1.2 Domestic Public Debt

About the structure of domestic debt, stands the fact that the discovery of the “hidden debts” in 2016 and the consequent suspension of external support, the government turned directly to the Central Bank to contract the debt. Other debt mechanisms such as Treasury bills and Treasury bonds also started to grow explosively in this period.

Chart 3: Structure of Mozambican Internal Debt (2010 – 2020)

1.1.1        Debt Service/Revenues  

According to the HIPC methodology, debt service should not exceed 25% of revenues. This indicator measures the government’s ability to honor its commitments to creditors with domestic revenues.

This indicator remained relatively stable (with some fluctuations slightly above and below the limit) until 2014. However, from 2014 on, it started to grow exponentially until it reaches the peak of 61% in 2016. Due to debt renegotiations, the indicator reduced, however, without reaching the sustainability limit again. However, from 2018 it increased again until it reaches 55% in 2020. Therefore, in the last five years, this indicator was unsustainable as shown in the graph below.

Chart 5: Debt Service/Revenues (2010 – 2020)

1.1       Impact of Debt Service on Health Sector Financing

As mentioned above, although public debt is an important source of financing public expenditure, including the health sector, its contracting must take into account sustainability criteria to avoid hindering investment in important sectors of the economy and society in the short, medium and long term. Thus, this subsection includes a comparison of health sector expenditure and debt service. The subsection also discusses the opportunity cost of debt service for the health sector.

1.2.1. Debt service VS Health Expenditure

The nominal comparison of debt service in the health sector shows that, over the last decade, the financial effort, with debt service, has increased about 23 times, growing from 9 billion meticais in 2010 to 213.6 million meticais in 2020. Meanwhile, the expenditure in the health sector has evolved modestly, quadrupling only over this period, rising from about 8 billion meticais in 2010 to about 32 million meticais in 2020. In summary, the financial effort that the government applied to service the debt in 2020 was more than 6 times greater than the expenditure on the health sector which, as mentioned above, faces challenges in serving the vast majority of the population.

Graph 6: Debt Service VS Health Expenditure (2010 – 2020)

1.1.1      Opportunity cost of debt service for the health sector

The analysis of the opportunity cost of debt service for the health sector is realized with the perspective of verifying what could have been done in the health sector with the resources allocated to debt service. In this sense, the fight against chronic child malnutrition was used as a variable to demonstrate the cost of opportunity. 

Chronic malnutrition is a variable that can undermine all socio-economic development efforts in the long run. According to UNICEF, in addition to contributing to child deaths and being detrimental to child health, chronic malnutrition has effects on educational attainment, which means deficiencies in the accumulation of quality human capital for the country’s long-term development (UNICEF, 2020). Mozambique has high rates of childhood chronic malnutrition, which affects 43% of children aged 0-59 months (IOF 2014/15), above the region’s average of 33%. According to SETSAN (2017), 26% of deaths of children under 5 years of age are associated with malnutrition. The World Bank estimates that, on average, $10,00 per year is needed to save children under 5 years old.

O gráfico a seguir mostra que, nos últimos 10 anos, o governo gastou em média 84,7 mil milhões meticais com o serviço da dívida. Contudo, tendo em conta que, para combater a desnutrição crónica infantil, seriam necessários em média 10,00 dólares por criança, os dados a seguir mostram que, em média, seriam necessários 1,9 mil milhões de dólares, ou seja, 44 vezes o que gastou com o serviço da dívida.

The following chart shows that over the past 10 years, the government has spent an average of 84.7 billion meticais on debt service. However, whereas it would take an average of $10.00 per child to fight chronic malnutrition, the data below shows that, on average, it would take $1.9 billion – meaning 44 times what it has spent on debt service.

Chart 7: Debt Service VS Budget Needed to Fight Malnutrition (2010 – 2020)

Such investment would save, on average, about 171,000 children a year (see the following chart).

Chart 8: Number of Children Lives that Could be Saved (2010-2020)

1.1       Health Sector Financing Alternatives

In Mozambique, much of the population lives in severe poverty, meaning that they do not have enough resources to meet their basic needs. Data from the IOF (2014/15) indicate that poverty has higher incidence in rural areas, where about 50.1% of people live in poverty. This indicator is quite worrying if we consider that rural areas occupy more than 90% of the national territory, hosting about 68% of the population (MADER, 2021). Data from the IOF (2019/20) indicate that, in rural areas, only 55.4% of the population has access to health services, that is, they walk at least 30 minutes on foot to reach a health facility.  

In analysis, the data above shows that the vast majority of the population lives in extreme poverty and does not have access to health services. Therefore, this subsection deals with financing alternatives for universal health coverage so that the population can access health services without heavy expenditure.

Below are some alternatives that may be applicable:

• Recovery of health expenses is not reflected in the insurers’ costs, in case of accidents. For example, in cases of car accidents, insurers tend to cover explicit costs of repairing the car. But when the client goes to public hospital, the bill is not passed on to the insurer in favor of the state, constituting an untapped source of revenue for the state;

• Special rate for large and profitable companies. Large companies in the mining sector, for example, can be charged some specific fees that can be allocated to the health sector;

• Tobacco and alcohol taxes. Consumer taxes on unhealthy products such as tobacco and alcohol can be an important source of revenue, contributing potentially in reduction of these harmful substances consumption, with negative impact on health.

• Excise tax on unhealthy food. A 20% tax on food high in fat, salt, additives, and sugar, for example.

2. Conclusions and Recommendations

This chapter is divided into two sections. The first section is concerned with conclusions, in which a summary of the main findings of the study are presented. The second section presents the main recommendations for development actors.

2. Conclusion

In the context of this study, these are the findings:

In the last 10 years, total public debt has grown almost 8 times, from about 119 billion meticais in 2010 to about 948 billion meticais in 2020. In this period, the external public debt corresponds about 80% of the debt stock. From 2015 onwards, domestic public debt began to increase exponentially, a factor that may be associated with the suspension of direct support to the State Budget, as a result of the scandal of the hidden debts.   

• Until 2014, the Government of Mozambique had contracted more debt with multilateral creditors than with bilateral creditors. Multilateral creditors (e.g. World Bank and IMF) are usually committed to the development of the country, therefore they offer relatively low interest rates and longer debt maturity periods, thus reducing the debt service burden on the State Budget. However, contrary to this assumption, starting in 2014, the government began to contract more debt with bilateral creditors, which have high interest rates and shorter maturity periods, increasing the debt service burden for the State Budget. Therefore, compromising the provision of essential public services to citizens.

• Debt sustainability, from 2015 onwards, extrapolated the sustainability limit of the debt/GDP stock (60%), established by SADC in the framework of macroeconomic convergence in the region. It should be noted that this scenario continued until 2020, when the indicator reached 142%, exceeding the limit more than 2 times. Regarding the debt service on revenues, the indicator was within the sustainability limit set by the HIPC initiative, 25%. However, in 2016, the indicator extrapolated the limit, having reached the highest point in that same year with 61%. However, in the following year, it fell again, but without reaching the sustainability limit, and remained so in subsequent years. In short, the debt stock and the debt service are unsustainable. 

•  The nominal comparison of debt service for the health sector shows that, in the last decade, the financial effort for debt service has increased about 23 times, growing from 9 billion meticais, in 2010, to 213.6 million meticais in 2020. While the expenditure, in the health sector, evolved more modestly, having only quadrupled over this period, rising from about 8 billion meticais in 2010 to about 32 million meticais in 2020. In summary, the financial effort that the government applied in service of debt, in 2020, was more than 6 times greater than the expenditure on the health sector which, as mentioned above, faces challenges in serving the vast majority of the population.

1.1       Recommendations

The recommendations of the study are:

(a) The Government should:

• Improve the transparency and accountability process in public debt contracting.
• Observe the budgetary rules associated with the limits on debt contracting.
• Follow the principles of sustainability in the public debt contracting process, carefully choosing the debt payment terms and interest rates that do not jeopardize the provision of public services in the short, medium and long term.
• Guarantee the health sector a fair proportion of resources, according to different priorities of the sector efficiency in budget execution, compatible with the progressive improvement of service delivery to the population.
• Explore domestic sources of financing avoiding undermining the provision of health services for the vast majority of the population.

b) The Parliament should:

• Press the government to improve the distribution of resources available for the provision of essential public services, including health.
• Press the government to observe the budgetary norms associated with public debt contracting, especially those that require approval by Parliament.
• Discuss alternative legal mechanisms to contain the growing and tendentiously unsustainable public debt.

c) The Administrative Court should:

• Support initiatives leading to greater severity in the legal treatment of typical cases of corruption, triggered by public officials or with their connivance, in the management of public affairs.

d) Donors should:

• Condition foreign aid to the observance of transparency criteria, accountability, improvement in the allocation of public service provision, according to the needs of the populations. 

e) Civil Society should:

• Put pressure on the government to respect the budgetary rules regarding debt contracting;
•  Put pressure on the government to direct the allocation of resources to priority sectors, including health;
•  Advocate for the identification of alternative sources to finance the provision of public goods and services in a way that does not make access to heath more expensive for the majority of the population.

f) The Administrative Court should:

• Provide support for initiatives leading to greater severity in the legal treatment of typical cases of corruption, caused by public officials or with their connivance, in the management of public affairs.