Executive Board Meeting
August 5, 1999

Executive Directors considered the paper entitled "Modifications to the Heavily Indebted Poor Countries (HIPC) Initiative"which had been prepared jointly by the staffs of the International Development Association (IDA) and the Fund. A companion paper on the financing of the ESAF/HIPC Trust was issued on August 2, and one on strengthening the links between debt relief and poverty reduction is expected later in August.

Directors welcomed the paper, which builds on the current HIPC Initiative framework with a number of specific modifications to strengthen it while adhering to the principles for change set forth by the managements of the Fund and the World Bank in April. Directors agreed with the general approach, including lower targets and thresholds that would provide deeper and broader debt relief. They underscored the importance of retaining the basic elements that had guided the HIPC Initiative, including participation by all creditors and a focus on sustainable development. Directors also cautioned that debt relief will only achieve its goals if it is integrated into an overall poverty reduction strategy. A few Directors stressed that in setting policy requirements for a completion point, governance issues should be addressed as a matter of priority.

Directors underscored that decisions on the enhancements to the Initiative need to proceed in parallel with agreement on additional financing--not yet secured--for the Fund's contribution to the HIPC Initiative, as well as that of other multilateral creditors, and the Bank in particular. Hence, today's discussion could only be considered preliminary. Decisions should also reflect an agreement on how to strengthen the link between debt relief and poverty reduction, on which a further paper is expected. Directors emphasized the need for all creditors, including the non-Paris Club bilateral creditors, to participate fully and equitably in an enhanced framework. A few of these Directors noted that some regional multilateral creditors may be constrained in their ability to participate.

Directors agreed that the debt sustainability targets under the current framework should be lowered to provide a greater cushion for the achievement of debt sustainability. To this end, Directors supported a lower net present value (NPV) of debt-to-exports target of 150 percent, thereby replacing the current target range with a single target. With respect to the fiscal window, Directors agreed to a lower NPV of debt-to-fiscal revenue target of 250 percent, and supported the lowering of the eligibility thresholds for the openness of an economy to an export to GDP ratio of 30 percent, and a revenue effort of 15 percent of GDP.

Directors also agreed to change the assessment base for debt relief under the Initiative from data projected for the completion point to actual data at the decision point. Directors noted that this would increase potential relief. These overall changes would broaden the number of countries that could potentially qualify for HIPC Initiative assistance.

Directors supported the provision of interim assistance and more front-loaded relief, as this could free up more resources for increased social and other poverty-reduction expenditures, subject to a country's capacity to make effective use of this earlier assistance and debt service falling due. They emphasized, however, that assistance should be provided in a way that maintains debt sustainability over the medium term, and results in a falling debt-service profile in relation to both exports and fiscal revenue. Some Directors noted that the cost implications for multilateral creditors of different profiles of front-loaded relief would have to be considered.

Most Directors were in favor of providing interim assistance by the Fund and other multilateral creditors in a cautious and pragmatic manner, provided the country was able to make effective use of early assistance, and that adequate funding was available. Directors supported the proposals made by the staff on how the Fund could provide interim assistance under an enhanced HIPC Initiative framework, underscoring that the provision of interim assistance should be conditioned on the pursuit of sustainable macro and social policies.

Directors supported the introduction of floating completion points in the HIPC Initiative as this would base the assessment of a country's performance on particular outcomes rather than the length of the track record. The use of floating completion points could also provide an incentive to implement reforms quickly and develop ownership over the timetable. In other words, this would put the countries themselves in the driver's seat in determining the timing of debt relief. However, several Directors noted that this was a major change in practice, and expressed concern that the reforms to which floating completion points were tied might be more ambitious than under the current framework, possibly leading to delays, which should be avoided. They therefore drew attention to the need to set clear policy priorities to avoid overloading the reform agenda. Others were concerned that it could be difficult to ensure fair treatment across countries. In view of these points, it was considered useful to provide examples of what a floating completion point would entail in practice, and there was general support for a review of floating completion points in one year.

Most Directors agreed that the proposed modifications to the framework would simplify implementation of the Initiative. In this context, country-specific vulnerability analyses and the category of borderline cases would no longer be required.

Most Directors agreed that the adoption of a decision point-based calculation of assistance would no longer require automatic reassessment at the completion point of the amount of assistance to be provided. Several Directors suggested that additional assistance could be provided on a discretionary basis to countries where exogenous shocks had led to a sharp deterioration in the debt situation at the completion point, underscoring the importance of providing a clear and permanent exit from unsustainable indebtedness at the completion point. A few other speakers, however, were concerned that such discretionary "topping up" at the completion point could give rise to false expectations.

Directors welcomed the inclusion of a more detailed analysis of debt service indicators in HIPC Initiative documents, including an analysis of the debt-service-to-fiscal revenue ratio and the overall budgetary context, and agreed that the delivery of debt-service should, on a country-by-country basis, reflect these indicators. They agreed that the debt-service-to-export ratio should fall within the 15 to 20 percent range or below, although this would not be a binding constraint. A few Directors suggested that the debt-service-to-fiscal revenue ratio should be the focus of the analysis of debt-service.

Directors agreed with the proposed mechanism for retroactivity, namely for countries that have already passed their decision points to benefit from the proposed enhancements to the framework based on their current (end-1998) situation. Directors stressed the importance of strong performance by countries eligible for retroactivity on both macroeconomic stability and the strengthened framework for poverty reduction emphasized under the enhanced HIPC Initiative, but they underscored that this should not lead to a third stage and unnecessary delays in the provision of debt relief to these countries. A few Directors, however, felt that countries may require additional time to put in place the reforms needed under the new framework to achieve effective poverty reduction. Directors stressed the need for continued aid flows to HIPCs, and urged donor countries to encourage policies in HIPCs related to poverty reduction and sustainable development. To help sustain progress by HIPCs, they considered that the international community should work to improve the access of these countries to industrial country markets, and restrain export credit lending and lending for unproductive expenditure to HIPCs. Several Directors also attached importance to new lending being provided on concessional terms and to the strengthening of debt management in HIPCs.

Finally, Directors agreed that the modifications paper be made available to the public by posting itas well as this summing upon the Fund's HIPC Initiative web site. This document should be viewed in conjunction with the forthcoming discussions on the other elements proposed to enhance the HIPC Initiative, including the financing of the ESAF-HIPC Trust and the modalities for achieving a strengthened link between debt relief and poverty reduction.