Press Release No. 01/26

Press Release: Chad To Receive US$260 Million in Debt Service Relief: The IMF and the World Bank Support Debt Relief for Chad under the Enhanced HIPC Initiative

May 23, 2001

The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for Chad under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total debt service relief from all of Chad's creditors is worth about US$260 million, corresponding to about US$170 million in Net Present Value (NPV) terms ¹, equivalent to about 30 percent of total debt outstanding after the full use of traditional debt relief mechanisms.

The assistance committed by IDA of US$68 million in NPV terms will be delivered over a 15-year period, and will cover on average 50 percent of debt-service obligations to IDA. The debt relief provided by the IMF of US$18 million in NPV terms will be delivered over the coming seven years. Both the IMF and IDA will start providing debt relief immediately. Total interim assistance will average about US$14 million annually, which is equal to just under 1 percent of GDP. Chad will receive the bulk of the assistance under the enhanced HIPC Initiative when it completes a number of agreed measures, including adoption and implementation of a full, participatory Poverty Reduction Strategy Paper (PRSP).

The government has developed a detailed plan for the use of funds made available by debt relief through the enhanced HIPC Initiative, and for their transparent and accountable expenditure through a "virtual" poverty fund. In this regard, the government has opened a special account with the Bank of Central African States (BEAC) where all HIPC Initiative resources are to be lodged and disbursed, with use of the resources fully integrated into the budget. An expenditure report specifically identifying expenditures financed by HIPC resources will be prepared every six months by a committee headed by the Minister of Finance. The reports will be made public and be discussed during the consultations updating the poverty reduction strategy. Projections indicate that HIPC relief will be directed primarily to increased expenditures on governance, health, education, social affairs, roads and rural development.

Annex

1. Chad

Poverty and Track Record: 1993-2001

With per capita GDP of US$188 in 2000, Chad is among the poorest countries on earth, ranking 167th out of 174 countries listed in the United Nations Human Development index. Approximately 80 percent of the population live below the international poverty line of US$1 per day. To compound these problems, erratic rainfall and declining agricultural production is contributing to Chad's worst famine in a decade.

After nearly three decades of civil war, the government of Chad has maintained relative peace and stability since the mid-1990s. Over the past eight years, the government has restored the basic functions of government and established an improved record of macroeconomic management. Real GDP growth averaged 4.3 percent per year. The external current account deficit was reduced substantially and inflation was brought under control, falling from more than 41 percent in 1994 to 4.3 percent in 1998.

Over that same time, budget deficits have been lowered sharply, while the composition of public spending has been redirected towards key social sectors, with solid outcomes. Life expectancy has increased, gross primary enrollment is higher for girls and boys, and infant and child mortality rates have fallen significantly.

Improvements were seen in governance as well. Chad adopted a new constitution in 1996, and since that time the country has held multiparty elections, created a supreme court and auditor general, and passed major anticorruption laws, establishing a special high court with jurisdiction over cases of misuse of public funds and financial and penal sanctions for violations. The government has also passed a Petroleum Review Management Law that provides for clear and transparent rules for allocating oil revenues, as well as for civil society participation in the Oil Revenues Control and Monitoring Board (CCRSP).

However, performance temporarily weakened in the second half of 2000, particularly in the area of governance and fiscal policies. Since November 2000, the government has taken a series of corrective measures to improve transparency and good governance. Fiscal performance has also improved, and structural reforms accelerated, including the reform of the civil service, public expenditure system, and of the cotton sector. Moreover, prices of domestic petroleum products have been liberalized. On the basis of the corrective measures and a strong commitment to sound macroeconomic and poverty-reducing policies, the IMF Executive Board approved the second annual Poverty Reduction and Growth Facility (PRGF)-supported program on May 16, 2001 (see Press Release No. 01/24).

Steps to be taken before the Completion Point

The full assistance from the IMF, IDA and other creditors will be delivered to Chad following the completion of a number of measures in key areas, including the development of a PRSP, implementation of reforms in macroeconomic management and governance, and strengthening of priority social sectors. A number of these measures are illustrated below. The number and specificity of the triggers for Chad reflect the authorities' desire to focus on results, and is consistent with the priorities identified during the participatory consultations for the PRSP.

• PRSP—Complete, and implement satisfactorily for one year, a fully participatory PRSP, for which the Executive Boards of the IMF and the World Bank will have concurred with the staff's assessment that it provides a sound basis for reaching the completion point under the enhanced HIPC Initiative, and for future concessional assistance.
  
  
• Macroeconomic Stability—Maintain macroeconomic stability and sustain commitment to the financial and economic program supported by the IMF's PRGF.
  
  
• Governance—Strengthen public expenditure management to facilitate the identification and tracking of poverty related spending; adopt a new law on public procurement, including publication of a quarterly bulletin; finalize audits by internationally reputable firms; adopt a governance strategy and action plan in consultation with the IMF and IDA and implement for at least one year.
  
  
• Priority Sectors—Ensure that 75 percent of all health districts and centers across the country are operational; strengthen the fight against the HIV-AIDS by increasing the sale of condoms; raise gross enrollment rate to at least 61 percent for girls and 89 percent for boys; improve road access; and increase access to potable water.
  
  

2. General

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced HIPC Initiative aims at reducing the NPV of debt at the decision point to a maximum of 150 percent of exports or 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three-dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 23 countries under the enhanced HIPC Initiative framework. Chad joins Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia, for total committed assistance estimated at more than US$34 billion, representing an average NPV stock-of-debt reduction of nearly 48 percent on top of traditional debt relief mechanisms.