I.  Introduction

1.   In April 2000, the Development and International Monetary and Financial Committees reviewed the status of the enhanced Heavily Indebted Poor Country (HIPC) Initiative, and urged all concerned to work for continued progress so that as many countries as possible can reach the decision point by the end of the year. The Committees also welcomed the establishment by the Bank and the Fund of a Joint Implementation Committee (JIC) to facilitate effective implementation of the enhanced HIPC Initiative and the new poverty reduction strategy approach. Finally, in noting that successful implementation of the Initiative will depend upon adequate financing, Ministers stressed that many multilateral institutions continued to require additional bilateral support, and urged donors to take the steps necessary to fulfill earlier pledges of contributions to help meet those costs. The purpose of this paper is to take stock of progress since the April Meetings and to present the overall status of and outlook for the enhanced HIPC Initiative.

2.   The paper is organized as follows: Section II discusses the progress made in implementing the enhanced HIPC framework. Section III presents an updated estimate of the cost of the Initiative and provides a comparison with previous estimates. Section IV provides an update on creditor participation and the financing of the Initiative. Section V assesses the experience with the floating completion point and reviews the sunset clause.

II.  Country Experience Under the Enhanced HIPC Initiative

3.   The enhanced HIPC Initiative adopted by the Boards of the Bank and the IMF in the fall of 1999 aimed at accelerating the delivery of HIPC Initiative assistance and linking debt relief more firmly and transparently to poverty reduction. At the same time, the enhancements more than doubled the amount of relief projected to be provided under the Initiative.¹

4.   The World Bank and the IMF have committed to renewed efforts in four areas necessary to achieve the goals outlined by the international community: moving forward expeditiously with country cases, to progress toward the objective of having 20 countries reach their decision point under the enhanced HIPC framework by the end of calendar year 2000², providing support to countries in preparing Poverty Reduction Strategy Papers (PRSP), setting up mechanisms for targeting and tracking use of resources freed by the HIPC Initiative, and facilitating the financing for multilateral participation in the enhanced Initiative.

A.  Broader Debt Relief

5.   Under the original HIPC Initiative approved in 1996, seven countries reached their decision points and five additional countries had their debt situations reviewed.³ Total assistance committed to these seven countries under the original framework was US$3.5 billion in net present value (NPV) terms. In the one year since the endorsement of the enhanced HIPC Initiative framework, enhanced HIPC relief packages have been endorsed for ten countries amounting to US$6.3 billion in NPV terms (see Tables 1 and 2).⁴ Seven further cases had their debt situation reviewed under the enhanced HIPC Initiative.

6.   The debt relief packages for countries that reached their decision points under the enhanced HIPC Initiative by early September 2000 represent about one-third of the entire HIPC Initiative. As of early September 2000:

• Ten countries will have reached their decision point and most benefit from assistance under the enhanced framework (Benin, Bolivia, Burkina Faso, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, and Uganda)⁴. Total debt service relief committed to these countries will amount to more than US$16 billion or US$9.2 billion in NPV terms. When combined with the two countries which had reached their decision points under the original framework (Côte d’Ivoire and Guyana), but have not yet been reassessed under the enhanced framework, total debt service relief committed under the HIPC Initiative will amount to US$17.4 billion or US$9.8 billion in NPV terms.

• Preliminary reviews under the enhanced framework will have been completed for seven countries (Cameroon, Chad, Guinea, Malawi, Nicaragua, Rwanda, and Zambia). Total debt service relief expected on a preliminary basis amounts to US$15 billion or US$8.3 billion in NPV terms for these countries. Two more countries were considered under the original framework (Ethiopia and Guinea-Bissau), and will be reassessed under the enhanced framework.

7.   Three countries do not require or wish to pursue relief under the enhanced HIPC Initiative: traditional debt relief mechanisms will be sufficient to reduce Yemen’s debt burden to a sustainable level; Ghana, although eligible for assistance based on debt sustainability criteria, is not seeking assistance under the Initiative; and Lao P.D.R. has informed the Bank and the Fund that it will not seek assistance under the Initiative.

B.  Faster Delivery

8.   One of the key objectives of the enhancements was to accelerate the provision of debt relief. In this regard, the enhanced framework included two main changes to the original Initiative: first, the provision of interim assistance beginning at the decision point, and second, the adoption of a “floating completion point.”

Interim assistance and the interim PRSP

9.   The enhanced HIPC Initiative relies on two key instruments—an interim PRSP and interim relief—in order to help reconcile the objective of rapid delivery of debt relief with the need to ensure that resources released will truly contribute to effective and sustainable poverty reduction. The interim PRSP can serve as a basis for taking a country to a decision point within the enhanced HIPC process. In an interim PRSP, a government should convey its commitment to poverty reduction, indicate its overall strategic goals and programs to address the issue, and define an action plan that would eventually lead to the articulation and adoption of a PRSP in a participatory process. The companion PRSP paper discusses in greater detail the early experience with this process. The provision of interim assistance from the decision point enables countries to benefit from debt relief while still preparing a full PRSP and putting in place other policy measures and actions that may be required for reaching the completion point. Interim assistance effectively reduces the burden of debt service payments on HIPCs while they prepare a full PRSP so that this can be done with due care and diligence.

10.   Under the enhanced Initiative all creditors are encouraged to provide some portion of their total assistance to each eligible country during the interim period. Interim assistance had been provided under the original Initiative by bilateral creditors in the Paris Club through flow reschedulings involving an NPV reduction of 80 percent (Lyon terms) on eligible debt. This interim assistance has now been topped-up by the Paris Club to 90 percent (or higher if needed) under Cologne terms.

11.   The predominant method of delivering relief on IDA debt will be through debt service relief. IDA delivers debt service relief, beginning at the decision point, with the aim of delivering its full share of debt relief to a country within 20 years after the decision point. Within this overall 20-year objective, IDA would provide annually, relief of not less than 50 percent of the IDA debt service due on the amounts disbursed and outstanding at the reference year when enhanced HIPC assistance is calculated. This level of debt service forgiveness would apply during the interim period, with maximum interim relief equal to one-third of the total NPV to be provided by IDA.⁵ IDA is providing interim assistance to eight of the nine countries which had reached their decision points under the enhanced framework by end-July 2000.⁶

12.   The IMF, subject to receipt of satisfactory financing assurances from other creditors, is committed to deliver interim assistance in the form of grants. These grants are paid into a country’s account, administered by the IMF as Trustee, and used to help meet the country’s debt service payments to the IMF. A country may receive as much as 20 percent of total IMF assistance (i.e., 20 percent of the total IMF share of relief for the country) each year during the interim period, up to the total annual debt service due to the IMF by that country. Interim assistance is not to exceed 60 percent of the overall IMF assistance. The IMF is currently providing interim relief to eight countries.⁷

13.   The Central American Bank for Economic Integration, the European Union, the European Investment Bank, and OPEC Fund, are either providing or have indicated their willingness to provide interim assistance. In July, the African Development Bank agreed on its modalities for participation in the enhanced framework, including provision of interim relief. Other multilateral development banks (MDBs) have been considering modalities to participate in a similar fashion.

Floating completion point

14.   The second modification to the original framework designed to accelerate delivery of debt relief was the adoption of floating completion points. This eliminated the original three-year interim period in favor of linking the completion point to the development and implementation of a PRSP, and the implementation of a set of key, pre-defined structural and social reforms. This places the timing of the completion point more clearly under the control of country authorities and enhances country-ownership of the reform program. Early indications suggest that this approach is helping to shorten the interim period. Section V provides a more extensive discussion of the early experience with floating completion points.⁸

15.   Based on the assessment by authorities for each of the current decision point countries, the interim period is expected to average about 15 months. Due to their special nature, the interim period for retroactive cases is expected to average less than one year, with Uganda having reached its completion point within three months after its enhanced decision point. For the new cases that have reached their decision point under the enhanced framework (Honduras, Mauritania, Tanzania) the interim period is expected to be two and a half years or less.

16.   It is important to recall that once countries reached their completion point under the original framework (Bolivia, Burkina Faso, Guyana, Mozambique, and Mali), they received the related debt relief irrevocably.⁹ For these countries, only the enhanced portion of debt relief as committed under the enhanced HIPC framework will be subject to the floating completion point requirements to the extent that it is not delivered in the form of interim relief.

C.  Deeper Debt Relief

17.   Under the enhanced framework, the target sustainability ratios were lowered¹⁰ to provide a greater cushion against unanticipated economic shocks to export earnings. This is intended to increase the probability of a permanent exit from unsustainable debt, and to significantly lower debt-service payments, freeing up resources to support poverty reduction efforts.

18.   Based on an analysis of the first nine countries to reach their decision points under the enhanced framework (Benin, Bolivia, Burkina Faso, Honduras, Mauritania, Mozambique, Senegal, Tanzania, and Uganda), progress is being seen in each of these areas (see Table 3). The US$9 billion (NPV terms) in assistance committed to these nine countries under the HIPC Initiative is projected to reduce the total debt stock in NPV terms by an average of 43 percent, reflecting reductions ranging from 18 percent in the case of Senegal to 73 percent in the case of Mozambique (Chart 1).¹¹ This will reduce the average NPV of debt-to-exports ratio for these countries at the decision point by 41 percent to 138 percent.¹² Current projections show the average NPV of debt-to-exports ratio for these countries will drop below 100 percent after 2005.

19.   Moreover, there have been notable cash-flow benefits. HIPC Initiative assistance will reduce the average ratio of debt service-to-export revenue in these nine countries to below 10 percent, one-half the developing country average. This represents an average annual debt service reduction of approximately US$750 million over 2000–2005, equal on average among these nine countries to savings of roughly 1.4 percent of GDP.

20.   In Table 4, a rough estimate is provided of what HIPC eligible countries can expect from HIPC debt relief combined with traditional debt relief mechanisms. In total, the 32 HIPCs can expect debt relief over time of about US$97 billion (about US$61 billion in NPV terms), with commitments in 2000 potentially reaching close to US$47 billion (about $28 billion in NPV terms). This would reduce their debts by roughly two thirds.

Linking debt service relief to poverty reduction

21.   A central objective of the enhanced framework endorsed last September was that countries would prepare credible, effective and monitorable poverty reduction strategies as the basis for access and use of extraordinary debt relief and other sources of concessional assistance provided by the Bank, the Fund, and other development partners. With regard to debt relief, institutional arrangements and procedures need to be developed to ensure that the savings from debt service are channeled towards programs linked to poverty reduction.¹³

22.   Bank and Fund teams are collaborating to assess country capabilities and provide guidance to governments on mechanisms to track and report on poverty-related public spending in HIPCs. A preliminary assessment of early cases suggests that funds “saved” through debt relief should be seen as part of the overall budget and monitored through the country’s own public financial management system. While countries themselves should bear the primary responsibility for monitoring and reporting, Bank and Fund staffs’ work in this area should emphasize providing assistance to HIPCs to strengthen their own public expenditure management systems.

23.   Over the longer term, this entails working to strengthening their entire financial management architecture. In the short-run, Bank and Fund staffs will assist in selected areas of public expenditure management, including working with those tools currently in place in each country for monitoring specific types of poverty-oriented spending. Some countries, such as Rwanda and Malawi, have a basic capacity to program, track and report on poverty-related recurrent public expenditures and the potential to relate these to social indicators. Other countries, such as Cameroon, are responding to significant shortcomings in their overall public expenditure systems by establishing special HIPC-arrangements and accounts to identify and track spending on poverty related programs. In virtually all cases, technical assistance and extensive efforts at institution-building will continue to be needed.

Ensuring long-term debt sustainability

24.   The weakening of commodity prices, notably the double digit declines since 1997 of the prices of cotton, coffee, cocoa, maize, sugar, and copper, combined with a sharp increase in oil prices over the past year, has adversely affected a large number of HIPCs that rely heavily on commodity exports and petroleum imports. As a result, about half of the 41 HIPCs are estimated to have suffered major terms of trade losses in 1999–2000 compared to 1997. These developments have created a difficult external environment for many HIPCs as they seek to maintain macroeconomic stability and establish track records for qualification under the enhanced HIPC Initiative. They also highlighted the difficulties and challenges many HIPCs are facing in achieving long-term debt sustainability, a key objective of the HIPC Initiative.

25.   Debt relief delivered under the enhanced Initiative allows HIPCs to return to external debt sustainability. However, maintaining external debt at sustainable levels ultimately requires that HIPCs continue to pursue sound economic policies, in particular timely adjustment to any economic shocks that may weaken their debt service capacity, prudent debt management, and adequate financing on appropriate concessional terms. In the context of PRGF- and IDA-supported programs, many HIPCs have undertaken to accelerate structural and institutional reforms to improve the efficiency of domestic resource mobilization and utilization, thereby increasing their resilience to adverse external developments.

26.   In view of the continuing large financing needs of many HIPCs, adherence to a policy on new borrowing that is consistent with long-term debt sustainability will play a particularly important role in preventing their external debt from rising again to an unsustainable level. Depending on each country’s specific circumstances, such a policy may require a strict limit on, or even exclusion in some cases of any, new borrowing by the public sector on nonconcessional terms. It may also entail a need for restraint on borrowing on concessional terms, and renewed efforts to shift concessional external financing from loans to grants. Clearly, such a policy also entails action by donor agencies to provide financing for poverty expenditures and development projects.

D.  Outlook for the Remainder of 2000

27.   From the time the enhancements to the HIPC Initiative were endorsed in September 1999, the goal of the World Bank and IMF has been to have decision points under the new framework in place for as many countries and as quickly as possible and justified, subject to measures put in place to help ensure effective use of the resources released by debt relief. We are currently working toward having 20 countries reach their decision points by the end of 2000. The time line of upcoming HIPC country documents is detailed in Table 5. The implementation of this ambitious timetable will depend critically on circumstances within a number of countries, including the performance of reform programs and the assessments thereof by IDA and Fund staff and on their Boards.

28.   In this context, the selectivity of the HIPC Initiative in favor of countries with relatively strong policy performance is relevant: countries that have reached their decision points earliest are those that have already established stronger (and longer) track records of policy performance. These track records have mostly included long periods with generally continuous support from IDA and the Fund. However, countries to be considered in the future will have more mixed track records, including periods of interruptions of reform, or reforms continuing in some areas accompanied by slowdowns or even reversals in other areas. More difficult judgements will need to be made in many of these upcoming cases regarding whether the appropriate conditions are in place for a decision point. Such judgements may need to weigh more explicitly the depth of reform along with the length of the track record, and balance the evaluation of macroeconomic, structural, and social reforms, as well as past reforms and the commitment to forward-looking reform programs.

29.   More specifically, these considerations highlight the issues of flexibility on the required track record. First, under both the original and the enhanced frameworks, a three-year track record of policy performance under Fund- and Bank-supported programs is normally required for a country to reach its decision point and merit the support of creditors under the Initiative. The Boards of the Bank and Fund have begun to interpret this somewhat flexibly in the sense that intermittent periods of good policy performance under Fund-supported programs are being considered in the assessment of track record. This has been applied in particular to cases where there is a gap between the expiration of one PRGF arrangement and the approval of a successor arrangement. Second, when the HIPC Initiative was launched in 1996, the implementation of one annual PRGF arrangement immediately prior to the decision point was also a precondition for reaching a decision point.¹⁴ This has since been implemented flexibly in the Board’s consideration of a few preliminary decision point documents.¹⁵ In some of the upcoming cases, early decision points may necessitate the elimination or a sharp compression of a track record requirement immediately preceding the decision point for countries that have not received Bank or Fund support for some time. While the link between debt relief and sound policy performance should clearly be maintained, these cases raise very difficult issues on the precise tradeoff between speed of implementation of debt relief and the quality of countries’ policies and their results in reducing poverty. These issues will need to be considered carefully in the review of individual country cases.

III.  Update on Costs of the Enhanced HIPC Initiative

30.   This section presents estimates of the costs of the enhanced HIPC Initiative and updates the previous costing estimates undertaken in December 1999.¹⁶ This costing analysis is based on the most recent country-specific information available. As will be discussed below, while the overall cost has increased somewhat compared to previous estimates, they remain broadly in the order of US$28 billion in 1999 NPV terms.

A.  Sources, Assumptions and Caveats

31.   This update of the December 1999 costing exercise takes into consideration the following factors:

• A total of 15 countries have presented HIPC documents to the Bank and Fund Boards with updated debt sustainability analyses (DSAs).

• Revisions to debt data and/or exports and revenue figures have been provided for fourteen countries that had their HIPC documents presented to the Boards.

• The timing of decision and completion points has been revised in light of actual developments thus far and the current outlook of country performance.

• Changes have taken place in the exchange rate and commercial interest reference rates (CIRRs) utilized for converting debt figures into U.S. dollar NPV terms.

32.   The country coverage and other data issues are described in Box 1. Out of a group of 41 HIPCs,¹⁷ costs have been estimated for 32 countries. Potential costs for two countries, Ghana and Lao P.D.R., have been excluded as they have indicated that they will not seek assistance under the HIPC Initiative. The latest DSA for Yemen has confirmed that the country has a sustainable debt burden. The debt levels of three other countries, Angola, Kenya, and Vietnam, are currently expected to be sustainable with debt relief under traditional mechanisms. As such, these four countries are not expected to require assistance under the HIPC Initiative, and no costs are assessed for these countries. Finally, as in all previous costing exercises, Liberia, Somalia, and Sudan were excluded from the cost exercise due to weak databases and the protracted time that will be required to resolve their large arrears problems.¹⁸

33.   As in all earlier costing exercises, a number of caveats apply. The costing estimates need to be interpreted with caution in many cases given that loan data between creditors and debtor governments has not yet been fully reconciled, especially for countries that have yet to reach their decision points. Moreover, for countries with decision points expected after 2000, data are subject to a wide margin of uncertainty as these are based on current staff expectations of the timing of the decision point and on projections of indebtedness, exports and fiscal revenues. The staffs have aimed at providing a realistic estimate of the timing of decision points, but the actual timing will in large part be driven by a country’s policy record and its progress in producing a PRSP or an interim PRSP. This costing exercise is not intended to prejudge the results of the loan-by-loan DSAs nor the Boards’ decisions with respect to eligibility for assistance under the HIPC Initiative.

B.  Results of Costing Update

34.   Total costs for the HIPC Initiative are now estimated at US$28.6 billion in 1999 NPV terms (see Table 6), slightly above the previous cost estimate of US$28.2 billion. The breakdown of costs—which was previously estimated to be equally shared between bilateral and multilateral creditors—remains broadly unchanged.

35.   The slight rise in estimated costs for bilateral creditors, from $14.1 billion to $14.6 billion in end-1999 NPV terms, reflects a US$0.9 billion rise in the combined costs of non-Paris Club official bilateral creditors and commercial creditors and a US$0.4 billion decline in the costs of Paris Club creditors. This revision reflects refinements in the data used in a number of upcoming decision point cases. With respect to multilateral creditors, cost estimates remain largely unchanged; detailed costs are shown in Table 7.

36.   A breakdown of the costs for the near-term cases—i.e., the countries with decision points under the original framework and new country cases expected to reach their decision points before the end of 2000—indicates that about 65 percent of the cost, or US$18.3 billion, is expected to be attributable to the near-term cases (see Table 8). For these countries the Paris Club has the largest share of bilateral costs, with 72 percent of the total bilateral costs, followed by non-Paris Club official creditors (25 percent) and commercial creditors (3 percent) (Table 9). For comparison, on the basis of all countries expected to require HIPC assistance, Paris Club costs represent 75 percent of bilateral costs, non-Paris Club creditors 17 percent, and commercial creditors 8 percent (Table 6). Near-term countries are expected to start benefiting from interim relief during 2000 or early 2001.

37.   Beginning with the December 1999 costing exercise, cost estimates have been disaggregated for MDBs in order to provide more accurate information to individual institutions. Staffs have also started to provide in individual country documents a detailed breakdown of bilateral costs. This information is now available for 20 countries that have presented HIPC documents to the Board. Tables 10 and 11 summarize this information and provide cost estimates for Paris Club and non-Paris Club official bilateral creditors by creditor country for (i) individual HIPCs that have reached their enhanced decision points, and (ii) an aggregate cost for those countries that are expected to reach their decision points in 2000. Within the Paris Club, France, Germany, Italy, Japan, and Russia carry the largest share of costs for the near-term HIPCs. For this same group of HIPCs, China, Costa Rica, Guatemala, and Kuwait are the largest non-Paris Club creditors. Relative to the size of their respective economies, debt relief costs are largest for Costa Rica, Guatemala, Honduras, and Trinidad and Tobago (Table 12).

IV.  Participation of Creditors in the Enhanced HIPC Initiative

A.  Participation of Official Bilateral Creditors

38.   Actual commitments from bilateral creditors to provide the assistance required under the enhanced HIPC Initiative have been obtained so far largely from the Paris Club, with hardly any from other bilateral or commercial creditors. Executive Directors considered the participation of official bilateral creditors in April. This discussion concluded that the comprehensive participation of all creditors was critical for the HIPC Initiative to meet its objective of eliminating unsustainable debt burdens. Directors endorsed the current proportional approach to burden sharing as the basis for moving forward, and urged all bilateral creditors to contribute on comparable terms. It was recognized that some official bilateral creditors might have difficulties in meeting their share of the cost, in particular the problem of HIPC creditors that are themselves eligible for assistance under the Initiative. Most Directors considered that such cases should be dealt with on a case-by-case basis. The discussion focussed on working flexibly and creatively towards solutions, particularly where HIPC-eligible countries are creditors of other HIPC countries, while respecting the basic principles of the HIPC Initiative.

39.   Since these discussions, the staffs have continued their contacts with non-Paris Club bilateral creditors to discuss their participation in general as well as in individual country cases. In order to share information at an early stage, meetings have been held with Executive Directors representing such non-Paris Club creditors, following the discussion of a preliminary HIPC document or a decision point, in order to clarify their expected cost share and seek preliminary indications of their willingness to participate. Staff have also sought to intensify consultations with individual creditor country authorities to seek ways of ensuring comprehensive participation while addressing the concerns of the creditor, and have met with some creditors to discuss these issues. For example, Bank staff visited Costa Rica in June with a set of illustrative scenarios that explored possible ways of providing debt relief to Nicaragua and Fund staff followed up in early August. Further follow-up meetings with creditors are planned during the forthcoming Annual Meetings.

40.  Among Paris Club creditors, 18 countries have pledged debt relief beyond their assistance under the HIPC Initiative. The extent, coverage, and modalities of the additional debt relief differ among the various creditors (Table 13). Creditors that have pledged to offer 100 percent relief on all pre-cutoff date debt include Australia, Canada, France, Germany, Italy, Japan, Netherlands, Norway, Switzerland, the U.K. and the U.S. In addition, several countries have pledged 100 percent debt relief on post-cutoff date debt as well (Australia, Canada, Norway, the U.K., and the U.S.). In most cases, the debt relief offered under these bilateral commitments is expected to be provided to debtor countries once they have reached their completion points, but Germany, Norway, the U.K. and the U.S. have offered to deliver this additional assistance from the decision point.

B.  Participation and Financing of Multilateral Creditors

41.   Since the Spring Meetings, there has been steady progress in securing confirmation of participation by multilateral creditors. As of end-August 2000, MDBs representing over 95 percent of the multilateral exposure to HIPCs have confirmed their participation in principle in the enhanced HIPC Initiative. In addition, most organizations have defined their modalities of providing debt relief, with the predominant modality being coverage of debt service of at least 50 percent of the amounts falling due. To further discuss MDB participation and financing, the Bank will host its next semi-annual meeting with MDBs and the Fund in October 2000.

42.   With regard to financing IDA debt relief, it is expected that IBRD net income transfers to the World Bank component of the HIPC Trust Fund will permit the Trust Fund to reimburse IDA for the debt relief it is projected to provide up to 2005. Towards this end, IBRD has already allocated US$1,050 million from its net income and surplus to the HIPC Trust Fund. In August 2000, the Executive Directors recommended to the IBRD Board of Governors another transfer of US$250 million from fiscal year 2000 net income. This recommendation will be considered during the Annual Meetings in late September in Prague. Beginning around 2005 (the end of IDA13), donor funding will be needed to reimburse IDA for the forgone debt service on IDA credits—estimated at roughly US$500 million per annum, or about US$1.3 billion in IDA14 and US$1.6 billion in IDA15. In addition, donor contributions are being sought to help finance the cost of three countries (Cameroon, Côte d’Ivoire, and Honduras) that have material levels of outstanding IBRD debt for which IBRD net income transfers to the HIPC Trust Fund cannot be used. Total funding between now and 2003 needed to provide debt relief on IBRD debt is estimated at about $825 million. Several donors (including Australia, Italy, Netherlands and New Zealand) have made specific pledges or contributions to the World Bank component of the HIPC Trust Fund to provide support for the debt relief efforts by the World Bank, and several others have indicated their intentions to do so. If adequate donor funding for this purpose is not available, this relief will be provided by IDA predominately in the form of refinancing through new IDA supplemental HIPC debt relief grants and credits. The total nominal funding gap for the World Bank over time has been estimated at close to $9 billion.

43.   As regards the financing situation of the IMF’s costs under the enhanced Initiative, bilateral contributions to the PRGF-HIPC Trust have increased somewhat since last May. About 80 percent of pledged bilateral contributions have either been received or are being provided on the basis of an agreed schedule as of end-July, 2000.¹⁹ To enable the Fund to continue providing its assistance under the HIPC Initiative beyond late 2000 depending on the progress in individual country cases, it is essential to secure the release of the remaining five-fourteenths of the investment income on the profits from gold sales and to make effective the pledged bilateral contributions that are still pending.²⁰

44.   In June 2000, a framework agreement was reached on steps to achieve the participation by the Inter-American Development Bank (IaDB) in the enhanced HIPC Initiative, with the institution contributing about US$800 million in NPV terms of its own resources. This framework also provides appropriate support for the participation of subregional MDBs in Latin America and the Caribbean in the Initiative. Under the financial framework agreed, the United States would contribute US$200 million to the debt relief efforts by these MDBs, Canada US$25 million, non-regional member countries US$200 million, and IDB borrowing member countries US$150 million. The agreement is contingent on these donor pledges, which remain to be secured.

45.   At the end of June 2000, the Deputies of the African Development Fund (ADF) reached agreement on the global funding process of the enhanced Initiative for the African Development Bank (AfDB) Group. Subsequently, the AfDB Board of Directors decided to increase the AfDB’s contribution of its own resources to US$370 million. It was agreed that about 80 percent of the debt service due would be covered by HIPC debt relief, with interim relief being capped at 40 percent of the share of total debt relief. At the decision point, the AfDB could make a commitment for the full interim relief and assurances by donors would be provided to fund the remaining debt relief by the completion point.

46.   The HIPC Trust Fund has received bilateral donor pledges and contributions of close to US$2.6 billion as of end-July 2000. Table 14 details the donor specific pledges to the Trust Fund. Of this total, donors have paid in close to US$750 million to support debt relief to MDBs other than the World Bank or IMF. This amount includes a payment of US$227 million by the EU/EC.

47.   Based on the recent developments in funding the Latin American MDBs, the AfDB Group as well as some tentative estimates for funding needs for several small African MDBs, staff estimate that about US$2.6 billion in NPV terms (about 48 percent) of the HIPC cost accruing to MDBs, excluding the World Bank and IMF, would need to be covered by donor support (see Table 15). The most immediate financing issue involves securing the financing called for under the HIPC financing framework developed by the IDB Governors in June which remains crucial to implementation of the Latin American cases. Comparing the financing needs for MDBs with the HIPC Trust Fund pledges (Table 16), it is important to keep in mind that the financial support needs are derived from the costing exercise which is done in NPV terms while the pledging is done in nominal terms. A significant portion of these donor pledges would be paid into the Trust Fund over time. Consequently, the NPV of these pledges will be lower than the nominal amount. The actual NPV value of the Trust Fund resources will depend on the timing of the receipt of this donor funding. As payments from some donors are likely to stretch out over the next three years or more, the NPV of the US$2.6 billion in existing donor pledges (excluding those for the World Bank and IMF) is estimated in the order of $2.1 billion. Therefore, additional funding will need to be raised to finance the US$2.6 billion in NPV terms, which is the estimated HIPC cost accruing to MDBs which would need to be covered by donor support. This will become particularly acute as the completion points of the large post-2000 countries are reached.

48.   Looking to the future, donors have agreed that they should meet periodically to review the HIPC financing situation. Most recently, donor representatives took advantage of the IDA12 midterm review meeting in Lisbon in June 2000 to review and discuss the overall status of HIPC costs and financing for multilateral creditors, including IDA and IBRD. Next steps include: (i) a technical meeting currently scheduled to take place on the occasion of the ADF-8 midterm review meeting in November 2000, (by which time the decision-making process in the Inter-American Development Bank will most likely have reached completion), and (ii) a review of the overall HIPC financing situation analytically separate but back-to-back with IDA13 replenishment meetings (which are expected to start in the spring of 2001).

V.  Review of Floating Completion Points and the Sunset Clause

A.  Experience with Floating Completion Points

49.   Floating completion points were introduced with the enhancements to the HIPC Initiative in the fall of 1999. The modalities as set out by the staffs ²¹ found broad support by the Boards.²² This approach was expected to entail a country reaching its completion point when it had implemented a set of key, pre-defined social and structural reforms and maintained good macroeconomic performance. Speedy implementation of key reforms was expected to enable countries to shorten the interim period from the three years under the original HIPC framework.²³ The floating completion point was expected to be linked to the implementation of crucial building blocks underpinning durable growth, debt sustainability and poverty reduction. Floating completion points were seen as a way to help countries focus on the key reforms needed for sustainable development and poverty reduction. Yet it was recognized that it could be more challenging for the staffs together with country authorities to define the small number of key macroeconomic, structural and social reforms required for economic growth and poverty reduction.

50.   The Boards welcomed floating completion points as they based the assessment of a country’s performance on particular outcomes rather than the length of the track record. Floating completion points were expected to provide an incentive to HIPCs to implement reforms quickly and develop ownership over the timetable. Some Directors were concerned that the reforms to which floating completion points were tied might be more ambitious than under the original framework thereby leading to undesirable delays. Other Directors were concerned that the desire to deliver debt relief might undermine the need to ensure effective progress on policies and governance issues. Thus a need was seen to set clear priorities and avoid overloading the reform agenda. Other concerns included the difficulty in ensuring fair treatment across countries. In light of these concerns, Directors requested a review of floating completion points in one year.

51.   All ten countries that have reached decision points under the enhanced Initiative so far, including seven retroactive cases, have the irrevocable release of HIPC Initiative assistance linked to floating conditions.²⁴ The range of policy areas covered by this conditionality has been broad and covers three general categories central to poverty reduction: social policies, structural reforms, and macroeconomic performance (see Annex I). All countries were required to maintain stable macroeconomic positions as evidenced by continued implementation of economic programs supported by the Fund and the Bank. There was also a strong and clear link between the completion points and the PRSP process, evident in the requirement that all countries have a PRSP, and, except for the transition arrangements agreed for the retroactive cases, one satisfactory annual progress report of implementation of the PRSP.

52.   There was considerable variation in the structural and social sector measures, reflecting the particular priorities and needs of the countries concerned. While the early cases such as Uganda and Bolivia had fewer specific measures, the later cases typically comprised 4-6 such country-specific factors.

53.   Key structural reforms tied to the completion points are specified in seven cases. While these conditionalities cover a wide range of areas, reforms that feature prominently concern tax systems and governance. Tax reform measures focus on implementation of VAT and strengthening of tax administration (Mauritania, Mozambique, Senegal, and Tanzania). Governance reforms include steps to increase transparency and accountability of public financial management and adoption of action plans/strategy to reduce corruption and improve governance (Benin, Burkina Faso, Honduras, Mozambique, and Tanzania). Other areas include privatization, banking system restructuring, judicial reforms, land, and energy sector reform.

54.   Given the multidimensional nature of social sector outputs, social sector conditions are not defined in a binary (yes/no) fashion. Rather, the documents specify a set of indicators and measures which allow a broad assessment of progress in poverty reduction. In Uganda’s case, the only country so far to reach its completion point under the enhanced framework, the completion point measures were defined broadly as “overall progress” in poverty reduction. In other cases, conditionalities have been more detailed and country-specific: For Mozambique, the impact and damage of floods is an important factor in the assessment of social needs along with budgetary allocations on AIDS and other social programs. In the case of Senegal, completion point measures include educational reforms supported by IDA and specific health care targets (pre-natal care for pregnant women and prevention of endemic diseases). Benin’s key measures include increased budgetary allocations to the health sector focussing on a national plan to fight AIDS, increased specified child immunization rates and eliminating school fees for all pupils in all rural areas. Honduras’ completion point measures entail an increase in the number of schools with community participation and strengthening the basic health service for the poor. In the case of Tanzania, measures included an increase in the immunization against DPTs and a national campaign to raise the awareness on HIV/AIDS. For Burkina Faso, there was an important need to maintain a sufficient stock of generic drugs in the national drug company. In Mauritania, the completion point measures include the government’s aim to reduce the share of the population below the poverty line to 40 percent, as well as a wide spectrum of health and education reforms.

55.   The early experience shows that country authorities generally expect to meet the agreed conditions and reach their floating completion points within one to two years from their decision points, providing for a shortening of the interim period to less than three years (see Annex). In implementing the floating completion point, there is a considerable challenge in selecting a small number of elements from the numerous reforms needed to underpin sustainable growth and poverty reduction. Failing to do so would risk overloading the reform agenda and a lengthier interim period than expected. Therefore, efforts will continue to be made to limit floating completion point measures to a few (3–4) areas that are the most critical for poverty reduction and are, to the extent possible, monitorable.

B.  Sunset Clause

56.   Under the HIPC framework, the first milepost toward establishing a policy track record needed to qualify for HIPC debt relief is the so-called entry requirement.²⁵ The 1996 Program of Action stated that “the Initiative would be open to all HIPCs that pursue or adopt programs of adjustment and reform supported by the IMF and IDA in the next two years, after which the Initiative would be reviewed and a decision made whether it should be continued.”²⁶ In 1998, the Boards reviewed the sunset clause and agreed to its extension to end-2000.²⁷

57.   Of the 41 HIPCs, 34 have met the entry requirement (Table 2). However, seven countries have not yet done so: Angola, Burundi, Democratic Republic of Congo, Liberia, Myanmar, Somalia, and Sudan. Except Angola, all these countries are expected to require HIPC debt relief. An accurate assessment of their debt situation is impossible for most of these cases since most of them are or have been suffering from conflicts. Moreover, most of them have weak economic databases and protracted arrears with international creditors, including the Bank and the Fund.

58.   The original intention of the sunset clause was that the HIPC Initiative would not be a permanent facility. The sunset clause was meant to give countries an incentive to adopt IDA- and IMF-supported adjustment programs. However, the experience over the last four years has shown that only two countries, São Tomé and Príncipe and the Central African Republic, actually started a program supported by the Bank and Fund.

59.   Based on a preliminary analysis of those countries that have yet to pass the entry requirement, it is very likely that they will need comprehensive debt relief, including from multilateral institutions. Therefore, the Boards have agreed to extend the sunset clause by another two years.

Benin

Retroactive; eDP in 7/00

Continued implementation of the WB/IMF - supported program

• Adoption of a strategy to privatize SONAPRA after its monopsony is abolished

• Establishment of a medium-term expenditure allocation program

• Production of treasury balance monthly

• Preparation of PRSP

• Adoption of an anticorruption strategy

• Increasing allocations from the internal budget for basic health service including prevention of HIV/AIDS by allocating CFAF 500 million in 2001

• Immunization of children below one year to 85 percent and at least 75 percent in each region; similar ratios for measles are 80 and 70 percent respectively

• Elimination of school fees for all pupils in rural schools and provide grants to schools for loss of revenue; provide grants to hire teachers to fill school vacancies

mid-2001

Bolivia

Retroactive;
oDP in 9/97;
oCP in 9/98;
eDP in 2/00

Continued implementation of the WB/IMF - supported program

• Preparation of PRSP

• Completion of National Dialogue with civil society, expected to be completed in August 2000

• Adoption of fully defined anti-poverty strategy and comprehensive set of indicators to monitor poverty reduction

• Acceptable progress in reducing poverty

early 2001

Burkina Faso

Retroactive;
oDP in 9/97;
oCP in 6/00;
eDP in 6/00

Continued implementation of the WB/IMF - supported program

• Completion of budget execution report with a three year history to be audited by Supreme Audit court

• Dissemination of a national plan for good governance by March 31, 2001

• Preparation of PRSP

• Adoption of an action plan to recruit additional teachers in line with the 1998 civil service reform by March 31, 2001; increase the efficiency of primary schools

• Implementing vaccination rates for DPT3 from 42 percent of children aged 12-24 months in December 1999 to 50 percent by December 2000

• Increasing the proportion of health centers meeting minimum staffing norms from 60 percent in 1999 to 65 percent in 2000

• Maintaining the incidence of insufficient stock (of 45 essential generic drugs) to less than 8 percent

• Monitoring public resources channeled to health districts to support annual plans

Spring 2001

Honduras

eDP in 6/00

Continued implementation of the WB/IMF - supported program

• Reform of the social security system covering health and pension

• Strengthening of the financial sector by applying the Basel Core Principles and by increasing capital adequacy ratios from 9 to 10 percent

• Preparation and implementation of a comprehensive anti-corruption strategy

• Successful implementation of the full PRSP for at least one year

• Improvement in the quality of education by increasing the number of schools with community participation to 1350

• Strengthening the basic health service for the poor measured by delivering a basic package of health services to at least 100,000 beneficiaries (emphasizing maternal/child care) in poor communities

• Implementation of social investment projects based on participatory planning in all beneficiary municipalities

mid-2002

Mali

Retroactive;
oDP in 9/98;
eDP and
oCP in 9/00

Continued implementation of the WB/IMF - supported program

• Privatization of public utilities and banks

• Continued implementation of reforms under the cotton sector rehabilitation plan

• Preparation of PRSP

• Implementation of reforms in the health sector

• Implementation of reforms in the education sector

mid-2001

Mauritania

eDP in 2/00

Continued implementation of the WB/IMF - supported program

• Privatization of Air Mauritanie and parts of other utility companies

• Compliance by commercial banks with prudential regulations on capital adequacy ratios

• Removal of foreign exchange restrictions so that spreads between interbank and parallel rates are less than 10 percent

• Unification of VAT rates.

• Preparation of PRSP and satisfactory implementation for at least one year

• Reducing the share of the population below poverty line to 40 percent

• Improvement in access and survival rate in primary and secondary education by raising enrollment rate of primary education to 99 percent, increasing the share of girls in primary enrollment to 49 percent and improving the survival ratio at the entrance of the 5^th grade to 67 percent

• Increasing vaccination rate for children to 70 percent; maintaining HIV prevalence rate at the levels of 1998, and setting up a central procurement facility for essential drug contraception

mid-2002

Mozambique

Retroactive;
oDP in 4/98;
oCP in 6/99;
eDP in 4/00

Continued implementation of the WB/IMF - supported program

• Strategic plan for a judicial system; drafting a new commercial code and regulations for private sector involvement in telecom and energy sectors

• Publication of quarterly budget execution reports; review of tax and custom exemptions; public sector reform

• Preparation of PRSP

• Satisfactory progress in tracking of budgetary resources for poverty reduction, developing strategies and budgetary allocations in health, education and national AIDS program and improving key social indicators

• In assessing performance, due consideration given to the impact of floods

March 2001

Senegal

Retroactive;
eDP in 6/00

Continued implementation of the WB/IMF - supported program

• Privatization of the streamlined 11 public sector enterprises

• Improvement in public savings by targeting fiscal surplus to be at least 1 percent of GDP in 2000 and 2.2 percent in 2001

• Removal of distortions in the energy sector

• Establishment of a single taxpayer identification

• Preparation of PRSP

• Supporting IDA’s Quality Education For All program focussing on recruitment of teachers, increases in primary education to 44 percent

• Focussing IDA’s Integrated Health Sector Credit on primary health care, child immunization, pre-natal care and prevention of endemic diseases

• Establishment of an accurate database for monitoring poverty along with a comprehensive household survey

end-2001

Tanzania

eDP in 4/00

Continued implementation of the WB/IMF - supported program

• Reduction of excise taxes from 52 to 6; VAT on petroleum; abolish withholding tax on goods an services

• Improvement in utilities performance; land regulations to ensure land can be used as collateral

• Adoption of a national action plan for Governance and Public Financial Management and Public Audit

• Preparation of PRSP and satisfactory implementation for at least one year

• Improvement of the poverty database and monitoring capacity of social indicators

• Adoption of budgetary appropriations in line with poverty objectives

• Completing the mapping of schools covering 50 percent of all local authorities

• Completing the immunization of at least 75 percent of children under two years against measles and DPTs; campaign against HIV/AIDS with visits to 75 percent of all districts

mid-2001

Uganda

Retroactive;
oDP in 4/97;
oCP in 4/98;
eDP in 4/00;
eCP in 5/00

Adjustment and reform efforts satisfactory

• Preparation of PRSP

• Acceptable “overall progress” in poverty reduction

April 2000

Sources: HIPC country documents; and World Bank and IMF staff estimates.

1/ oDP: original decision point; oCP: original completion point; eDP: enhanced decision point; eCP: enhanced completion point.