October 7, 2004

1. This paper proposes amendments to the PRGF-HIPC Trust Instrument¹ to give effect to the conclusions reached by the Executive Board in September 2004 to extend the sunset clause to end-2006 and modify the eligibility criteria under the enhanced HIPC Initiative to limit the application of the extension of the sunset clause to the IDA-only/PRGF-eligible countries that have not yet benefited from HIPC debt relief and are assessed to have external public debt in excess of the enhanced HIPC thresholds after full application of traditional debt mechanisms based on end-2004 data.²

2. The proposed decision would introduce the requisite amendments into the PRGF-HIPC Trust Instrument. The following two points on the amendments should be highlighted:

• Modification to the eligibility criteria-by requiring a determination of unsustainable debt based on end-2004 data-would apply to all member countries that had not reached the decision point as of December 31, 2004.
  
  
• Qualification for HIPC assistance by eligible member countries, and amount of assistance to be provided by the Fund under the Initiative, will continue to be determined at the decision point on the basis of Section III, Paragraphs 2 and 3 of the Trust Instrument (subject to potential topping-up at the completion point).

3. Under the new framework, a closed list of member countries eligible for consideration of debt relief under the enhanced HIPC Initiative would be expected to be established by mid-2005, on the basis of end-December 2004 data, and that list will be presented for information of the Fund and Bank Executive Boards at that time.³

Proposed Decision

The following decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board:

The Instrument to Establish a Trust for Special PRGF Operations for the Heavily Indebted Poor Countries and Interim PRGF Subsidy Operations (annexed to Decision No. 11436-(97/10), adopted February 4, 1997) is amended, as follows:

a. Section III, Paragraph 1(b) shall be amended by deleting "December 31, 2004" and replacing it with "December 31, 2006."

b. Section III, Paragraph 1(d) shall be added, effective January 1, 2005, as follows:

"(d) after the assumed full application of traditional debt relief mechanisms, the member's external debt situation, based on end-2004 data, is unsustainable, as determined by the debt sustainability thresholds in Section I, Paragraph 1(v) of this Instrument."