News Brief No. 99/62

News Brief: Financing the HIPC and ESAF Initiatives

September 27, 1999

Following extensive discussions on financing of the Heavily Indebted Poor Country Initiative (HIPC) and Enhanced Structural Adjustment Facility (ESAF) initiatives, agreement has been reached on the main elements of a financing package that will enable the IMF to make its contribution to the HIPC Initiative and to continue concessional lending for sustainable growth and poverty reduction in its low income member countries.

The main elements of the financing package-amounting to SDR 3.9 billion on an "as needed" basis (US$3.5 billion in end-1998 net present value terms)--comprise contributions by member countries and by the IMF itself.¹ The financing of the cost of the HIPC Initiative to the IMF is projected to account for about two thirds of the IMF's total financing requirement.

· Bilateral pledges amount to about SDR 1.5 billion "as needed" and come from a wide cross-section of the IMF's membership, demonstrating the broad support for the HIPC and ESAF initiatives. Industrial countries as well as a large number of developing countries--including some low-income countries that have had ESAF-supported programs in the past--have made pledges to the ESAF-HIPC Trust.

Contributions by the IMF

· The IMF's own contributions will amount to about SDR 2.4 billion "as needed." The bulk of this will come from the investment income on the profits from off-market transactions in gold of up to 14 million ounces, estimated to provide about SDR 1.8 billion "as needed." The off-market transactions in gold by the IMF of up to 14 million ounces that are envisaged will be a one-time operation of a highly exceptional nature. It is part of a broader financing package to allow the IMF to contribute to the resolution of debt problems of the HIPCs at the turn of the millennium and to the continuation of concessional operations to support countries' efforts to achieve sustained growth and poverty reduction.

· The IMF will also contribute about SDR 0.6 billion "as needed" by foregoing compensation for the cost of administrative expenses related to ESAF operations through 2004, with the equivalent amount transferred from the ESAF Trust Reserve Account to the ESAF-HIPC Trust, and by transferring to the ESAF-HIPC Trust part of the interest surcharge on certain outstanding purchases under the Supplemental Reserve Facility related to activation of the New Arrangements to Borrow.

Off-market transactions in gold by the IMF

Off-market transactions in gold by the IMF will entail separate but closely linked transactions between the IMF and member countries that have financial obligations falling due to the IMF.

· In the first step, the IMF will sell gold to a member at the prevailing market price, and the profits from the sale will be placed in a special account and then invested for the benefit of the HIPC and ESAF initiatives.

· In the second step, immediately following the first, the IMF will accept, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations falling due to the IMF.

The net effect of these transactions will be to leave the IMF's holdings of physical gold unchanged. No gold will be released to the market, and thus there will be no impact on the supply and demand balance in the market. The IMF's gold holdings accepted in settlement of members' obligations (the second step above) will be recorded at a higher value in the IMF's balance sheet, and acceptance of this gold (instead of currencies or SDRs) in such settlements will reduce the IMF's liquidity, by the amount of profits transferred for the benefit of the HIPC and ESAF initiatives (under the first step above), and its net income.