Press Release No. 08/55

Press Release: IMF and World Bank Support Liberia's Decision Point Under the Enhanced HIPC Initiative

March 18, 2008

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) have agreed that Liberia has taken the steps necessary to reach its decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Liberia becomes the 33^rd country to reach its decision point and now qualifies for debt relief under the Initiative.¹

Mr. John Lipsky, First Deputy Managing Director of the IMF, said: "This has been a historic week for Liberia and the Fund. We have seen Liberia's long-standing arrears to the IMF cleared and the Fund has been able to provide significant new financial resources in support of the Liberian Government's reform program. Liberia has also reached a key milestone in its campaign to have its external debts reduced to sustainable levels by reaching the decision point under the Enhanced Initiative for Heavily Indebted Poor Countries."

Ms. Obiageli Ezekwesili, Vice President of the Africa Region of the World Bank, said: "Following the clearance of Liberia's arrears to the Bank back last December, today marks another important step in the country's progress towards full debt relief. Entering the HIPC process today is made possible by the Government's steadfast pursuit of reforms over the last two years. Liberia's re-engagement with the international community will provide the boost needed to address the remaining, monumental challenges faced by this post-conflict country."

The Government of Liberia will receive interim debt relief from some creditors, but in order to qualify for irrevocable debt relief at the completion point, Liberia has committed to implementing a broad set of reforms. In particular, Liberia is expected to maintain macroeconomic stability as evidenced by satisfactory performance under the IMF's Poverty Reduction and Growth Facility (PRGF); prepare and implement a Poverty Reduction Strategy for at least one year; and implement pivotal reforms in the areas of governance, PFM, debt management, as well as other structural and social measures.

Liberia will also be eligible for assistance under the Multilateral Debt Relief Initiative (MDRI) from the World Bank and the African Development Bank and beyond-HIPC assistance from the IMF upon reaching the HIPC completion point. This will further increase the resources available to the Government in order to reduce poverty.

Specifics of the Debt Relief Operation

• Liberia's public and publicly-guaranteed external debt was estimated at US$4.7 billion in nominal terms as of June 30, 2007.

• Debt relief under the enhanced HIPC Initiative is estimated at US$2.8 billion in NPV terms, equivalent to a 90.5 percent reduction of its debt after the full application of traditional debt relief mechanisms.² Over time, this will reduce Liberia's debt service payment obligations by about US$4.0 billion in nominal terms.

• Immediately following approval of the decision point by the Boards of IDA and the IMF, the IMF will begin to provide its share of HIPC assistance of SDR 448 million in NPV terms (equivalent to US$732 million), of which SDR 20 million (or US$32 million) would be delivered through the concessional element of its arrears clearance operation over the interim period. IDA has already provided its share of HIPC debt relief (US$375 million in NPV terms) through the grant element embedded in the clearance of arrears to both IBRD and IDA. Under the HIPC Initiative's burden sharing approach, the remaining estimated HIPC debt relief (US$1.7 billion in NPV terms) will be provided by Liberia's other creditors.

• MDRI debt relief from IDA could amount to US$36 million in NPV terms, assuming that Liberia reaches its completion point in the last quarter of 2010. Liberia is also expected to receive additional debt relief from the IMF to fully cover its remaining eligible debt outstanding at the completion point currently estimated at SDR102 million in NPV terms (or US$167 million).

Note to Editors:

Liberia is one of the poorest countries in Africa. Two civil wars during 1989-2003 have had a devastating impact on Liberia's economy, reducing real GDP to about 40 percent of its pre-war level. An estimated 64 percent of the population lives below the national poverty line, with 48 percent living in extreme poverty. The Accra Comprehensive Peace Agreement signed in 2003 initiated a political transition, culminating in presidential elections in October-November 2005. To address serious concerns regarding economic mismanagement, the National Transitional Government of Liberia, which governed during 2003-05, and key international partners established the Governance and Economic Management Assistance Program to improve financial and fiscal administration, as well as transparency and accountability. Soon after taking office in January 2006, the government of President Johnson-Sirleaf requested IMF assistance to develop a program to support economic reconstruction and to begin building a track record of policy implementation needed to resolve its arrears and debt overhang. Liberia has made satisfactory progress in implementing the staff-monitored program which has facilitated the rebuilding of public institutions, restored credible macroeconomic management, and supported implementation of important structural reforms to improve financial management and the financial sector. Liberia has also made good progress in implementing its Interim Poverty Reduction Strategy Paper (I-PRSP) covering the period from July 2006-June 2008; the full PRSP is expected to be finalized shortly. Arrears to the World Bank and African Development Bank were cleared in December 2007 and further steps are being taken to regularize relations with other creditors, including a meeting of the Paris Club scheduled for April.

The HIPC Initiative

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:

Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;

Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster; and

Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.
To date, 33 HIPC countries have reached their decision points, of which 23 have reached completion point.

¹ Countries begin receiving debt relief on an interim basis until the completion point is reached.

² The Net Present Value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal). It is a measure that takes into account the borrowing terms of a country's debt stock. Whenever the interest rate on a loan is lower than the prevailing market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.