News Brief No. 00/80

News Brief: The IMF and the Heavily-Indebted Poor Countries (HIPCs)

September 7, 2000

What is the status of the HIPCs under the debt reduction initiative? What are the IMF and World Bank doing to speed up debt relief? What else is being done to fight poverty in poor countries? This fact sheet answers these and other questions regarding the IMF’s work with heavily-indebted poor countries.

What is the status of the HIPCs under the debt reduction initiative?

More countries are getting more debt relief sooner than ever before. Of the 41 countries eligible for the HIPC Initiative:

• Two countries have opted out of the program (Ghana and Lao P.D.R.).
• Four countries have debt levels that are considered sustainable and are not expected to require exceptional HIPC assistance (Angola, Kenya, Vietnam, and Yemen).
• Over the past year, $10 billion of debt relief has been committed for ten countries under the enhanced HIPC Initiative, bringing total debt relief committed under the Initiative to around $17 billion for twelve countries. This represents an average reduction of over 40 percent in the debt burdens for these countries. And because the Initiative is now designed to make funds available more quickly, these countries are already getting cash-flow benefits from debt relief that are expected to average about 1½ percent of GDP per year over the next few years—enough to cover large increases in health and education spending.
• Of the remaining 25 countries, half are now establishing track records of sustained performance and developing plans for the use of debt relief to support poverty reduction and growth. These countries are expected to reach their decision points soon, allowing debt relief to start flowing. The IMF and World Bank are committed to helping all of these countries obtain debt relief as soon as possible, and we are working toward a goal of 20 countries by the end of 2000.
• Among the remaining dozen HIPCs, many are affected by conflict, civil unrest, and serious governance problems. Some may be able to move quickly towards debt relief once progress is made in resolving these problems. The speed with which these countries can get to their decision points will vary greatly.

What are the IMF and World Bank doing to speed up debt relief?

Despite the progress made, some countries are not receiving debt relief quickly enough. The Fund and the Bank are committed to doing everything they can to help these countries move forward as swiftly as possible. But the timing of debt relief will depend on how quickly each country can develop proposals for the effective and accountable use of the resources freed up by debt relief, and on their good performance in relation to the programs supported by the IMF and the World Bank. There have to be assurances that relief is not wasted, but rather is used in ways that will benefit the poor—the whole point of the exercise.

• We are reviewing the program in each country to ensure that the policy requirements for reaching the decision point are indeed critical to the success of the poverty reduction and growth agenda.
• We are also adopting a more flexible approach to the track record requirement in countries which have broadly satisfactory performance under Fund- and Bank-supported programs.
• We are stressing that requirements for the documentation on countries’ poverty reduction strategies should be as simple and flexible as possible.
• We have formed a high-level joint IMF-World Bank team—the Joint Implementation Committee—to oversee the debt relief process and tackle any problems that might come up.

How much will the HIPC Initiative cost?

The cost of the enhanced HIPC Initiative is about $28 billion in today’s dollars, but it is not yet fully financed. Funding constraints for some regional development banks have already led to delays in providing early debt relief to Bolivia and Honduras. To meet the costs of other HIPCs, funding looks reasonably assured through the end of this year, but it will soon become a constraint without additional action. In particular, the IMF will need authorization for the next portion of its share of HIPC costs, which are ultimately expected to total over $2 billion.

What else is being done to fight poverty in poor countries?

A key objective of official and civil society efforts to enhance the original HIPC Framework was to reinforce the link between debt relief and poverty reduction. This led to the adoption of a new approach under which all future concessional support from the Bank and the Fund would be based upon country-led poverty reduction strategies. Such strategies would be developed with the broad participation of civil society and other partners, and set out in a Poverty Reduction Strategy Paper, or PRSP. After a year of implementation, it is clear that this approach can lead to major changes both within countries and in how the international community—including the Fund and Bank—work to support country authorities.

The PRSP approach provides the best opportunity to achieve sustained poverty reduction. It is a step forward in putting the concept of country ownership into practice. It is a comprehensive approach to development which is focused on poverty reduction and growth, with a stronger focus on transparency and accountability at all levels. This is a long-term effort, not a short-term initiative: improvements in poverty indicators will not happen overnight. Variable progress is to be expected, especially among post-conflict countries.

What is an Interim PRSP?

The PRSP was introduced a year ago to more sharply focus countries’ poverty reduction efforts. However, given the year or more needed to prepare these papers, and with dozens of poor countries needing immediate concessional assistance from the IMF and World Bank, waiting for countries to complete PRSPs would have interrupted the flow of concessional loans. Consequently, countries were encouraged to prepare an Interim PRSP, drawing on existing data, plans, and policies, to guide their efforts during the PRSP preparation phase.

What progress has been made in implementing the PRSP approach?

Over the past year, this new approach has begun to guide the work of the Fund and Bank in about 20 countries, many of which are also HIPCs. By September 2000, 15 country-owned documents will have been considered by the IMF and World Bank Boards—13 Interim PRSPs and 2 full PRSPs (Burkina Faso and Uganda). Several other countries are in advanced stages of drafting or have completed Interim PRSPs (Central African Republic, Guyana, Nicaragua, and Yemen).

Does the PRSP process really work? What is being done to ensure it stays on track?

While the overall experience has been positive, the PRSP process has also highlighted a number of challenges: capacity constraints faced by developing countries; a need for the Fund and the Bank to modify their approaches to give more latitude to countries to make their own choices; tension between allowing strategies to be country-owned and ensuring they meet international quality standards; tension between the time needed to organize participatory processes and the need to quickly structure HIPC debt relief around the strategy.

Implementation is a key priority for the Fund and the Bank. The role of the Joint Implementation Committee is therefore important, to enhance the collaboration between the two and as a means to monitor progress and facilitate the evolution of Fund programs and IDA policy loans in low-income members.