Public Information Notice No. 04/111

Public Information Notice: IMF Executive Board Discusses the Status of Implementation of the Enhanced HIPC Initiative

September 30, 2004

On September 3, 2004, the Executive Board of the International Monetary Fund (IMF) discussed a report on the status of implementation of the Heavily Indebted Poor Countries (HIPC) Initiative, prepared jointly by staffs of the IMF and the World Bank.

Background

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as a comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily-indebted countries. It was enhanced in the fall of 1999 to provide for faster, deeper, and broader debt relief, aiming at reducing the net present value (NPV) of HIPCs' external public debt to a maximum of 150 percent of exports, or for small open economies, 250 percent of government revenue.

Eligible countries need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record under IMF- and International Development Association -supported programs. A key input in this process is the poverty reduction strategy paper, prepared with broad participation of civil society, and intended to serve as the basis for implementing the country's poverty reduction strategy.

Once a decision is made to grant HIPC relief, and provided that the country stays on track with its IMFand IDA-supported program, the IMF, IDA, Paris Club, and some other creditors grant relief on current maturities. When specific measures needed to strengthen poverty reduction efforts and macroeconomic management have been implemented, the IMF and IDA provide the remainder of the committed debt relief, and Paris Club creditors reduce the stock of debt as agreed; other multilateral, bilateral, and commercial creditors also contribute to the debt relief on comparable terms.

Some three dozen HIPCs are expected to be potentially eligible for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 27 HIPCs that have reached their decision points under the Initiative, with total commitment assistance estimated at about US$32 billion in NPV terms, or about US$53 billion in nominal terms. This, together with traditional debt relief, additional bilateral debt forgiveness beyond the HIPC Initiative, is expected to reduce the overall debt stock of these countries by two-thirds and to lower their debt service payments to under 10 percent of exports. Fourteen, or more than half of the HIPCs that have reached decision point, have also reached their completion points under the Initiative, at which time debt relief was delivered irrevocably. Eleven HIPCs have not yet reached the decision point due to difficulties in establishing a policy track record of performance, as most of them have been affected by conflict and several have large arrears to various creditors.

This report reviews progress in the implementation of the enhanced HIPC Initiative since September 2003.¹ It includes updates on the status of implementation in countries during their interim period, the status of creditor participation under the Initiative, and the estimated costs of the HIPC Initiative including Liberia, Somalia, and Sudan. The report suggests improvements to the analysis for the consideration of additional debt relief at the completion point (topping-up) taking into account the experience so far. It proposes a two-year extension of the sunset clause to end-2006 following discussions in the Boards of the IMF and the World Bank of a joint staff paper outlining the possible options.² Finally, the report provides an update of the external debt situation in post-completion-point countries, emphasizing the importance of sound policies and close monitoring using the framework of debt sustainability analysis for low-income countries in preventing the re-emergence of unsustainable debt.

Executive Board Assessment

Executive Directors welcomed the continued progress under the enhanced HIPC Initiative in providing debt relief to the world's poorest countries. They noted that 14 countries, more than half of the 27 countries that have reached the decision point, had reached the completion point, receiving irrevocably debt relief committed under the enhanced HIPC Initiative. As a result of HIPC relief and other debt relief initiatives, the overall debt stock of the countries that have reached the decision point or completion point would fall by two-thirds and their debt service-to-export ratios have been substantially reduced to an average of 10 percent, contributing to a significant increase in poverty-reducing expenditures in these countries.

Directors noted that maintaining macroeconomic stability remains a challenge for the 13 countries in the interim period between the decision and completion points. They encouraged these countries to stay on track with their economic reform programs and to make further progress in the development and implementation of their poverty reduction strategies in order to reach their completion points without delay. Directors recognized that nearly all the remaining countries that have yet to reach the decision point have been affected by conflict and several have large arrears to various creditors. Directors urged the staff to continue to work with the authorities in these countries, where possible, to overcome these obstacles. In this context, Directors underscored the urgent need to mobilize financial resources to enable the Fund to provide HIPC Initiative assistance to Liberia, Somalia, and Sudan once they qualify for such assistance.

Directors noted that ensuring the full delivery of debt relief under the HIPC Initiative by all creditors, particularly the remaining multilateral, official bilateral, and commercial creditors remains an important challenge. They reiterated their call to creditors that have not yet participated in the HIPC Initiative to contribute their share to reducing HIPCs' debt to sustainable levels. Directors welcomed the recent two-year extension of, and the enhancements to, the Debt Reduction Facility for IDA-only countries, which will be an important instrument in reducing commercial debt owed by HIPCs. Directors urged staff, within the mandate of the Fund, to help increase creditor participation, including HIPC-to-HIPC debt relief.

Directors agreed to extend the existing sunset clause under the enhanced HIPC Initiative by a further two years to end-2006, to provide the opportunity for the remaining countries that could qualify to establish a policy track record that would allow their consideration for HIPC relief. Directors agreed with the objective of bringing within the HIPC Initiative all poor countries with current unsustainable debts while preventing the Initiative from becoming a permanent facility. While many Directors supported extending the Initiative for two years without modification, other Directors expressed concern about keeping the list of countries open, given the limits on financing. The majority of the Board favored modifying this extension by ring-fencing application to IDA-only and Poverty Reduction Growth Facility (PRGF) eligible countries that have not yet benefited from HIPC debt relief and are assessed to have external public debt in excess of the enhanced HIPC Initiative thresholds after full application of traditional debt relief mechanisms based on end-2004 debt data. It was also suggested that at a future date consideration be given for extending the sunset clause time limit beyond 2006 if warranted, given the challenges facing some countries. Directors agreed on the importance of examining these proposals in light of available financing.

Directors welcomed the staff's suggestions to strengthen the country-specific analysis at the completion point for topping up in cases where topping up is being proposed, including on the impact of discount rate changes and the specific circumstances that give rise to unanticipated new borrowing, where relevant. A few Directors suggested that no new changes to the topping up formula should be considered. Several Directors stressed that new borrowing, which was previously anticipated, cannot constitute an adverse exogenous shock and that a decline in discount rates should not automatically lead to proposals for topping up. Some Directors considered that, with regard to topping-up considerations, completion point calculations should exclude additional voluntary debt relief.

Directors welcomed the updated information on the debt indicators of post-completion point countries. They acknowledged HIPCs' high vulnerability to shocks and encouraged them to be persistent in the implementation of sound economic policies including prudent debt management. In this regard, Directors expressed concern that some post-completion point HIPCs had debt ratios in excess of acceptable ratios and emphasized the importance of having an adequate debt sustainability analysis framework for low-income countries. They agreed that close monitoring using this framework would help prevent the re-emergence of unsustainable debt. They looked forward to discussing the staff paper on the implementation of this framework.