IMF Executive Board Discusses the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Status of Implementation and Proposals for the Future of the HIPC Initiative

On November 30, 2011, the Executive Board of the International Monetary Fund (IMF) discussed a paper on the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Status of Implementation and Proposals for the Future of the HIPC Initiative, which was prepared jointly by staffs of the IMF and the World Bank¹.

Background

As a result of progress in the last few years, 36 out of 40 HIPCs have qualified for debt relief by reaching the HIPC Initiative decision point, and 32 have reached the HIPC Initiative completion point, when debt is irrevocably cancelled, and also benefited from debt relief under the MDRI. Efforts to reach the completion point continue to be made with the four countries between the decision and completion points. Only three eligible countries—Eritrea, Somalia, and Sudan—are yet to start the process of qualifying for debt relief under the Initiative.

Debt relief under the HIPC Initiative and the MDRI has substantially lowered countries’ debt burdens. Debt relief to the 36 post-decision point HIPCs represents almost 35 percent of their 2010 gross domestic product (GDP). Together with debt relief under traditional mechanisms and additional (“beyond HIPC”) relief from Paris Club creditors, this assistance is estimated to reduce the debt burden for these countries by about 90 percent relative to pre-decision point levels. In parallel to the delivery of debt relief, HIPCs have increased their poverty reducing expenditure. For the 36 post-decision point countries, poverty reducing spending increased by more than three percentage points of GDP, on average, between 2001 and 2010, while debt service payments declined by a somewhat smaller amount. However, post-decision point HIPCs have made uneven progress toward meeting the Millennium Development Goals (MDGs).

The total cost of already committed HIPC Initiative debt relief to creditors is estimated at US$76 billion in end-2010 present value (PV) terms, while the total cost of the MDRI for the four participating multilateral creditors is estimated at US$33.8 billion in end-2010 PV terms.

As well as reporting on progress under the two initiatives, the paper considers how to streamline future reporting, and proposes further ring-fencing the list of countries eligible or potentially eligible for debt relief under the HIPC Intiative in order to reduce the risk of moral hazard.

Executive Board Assessment

Directors welcomed the progress that has been achieved under the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) in reducing the debt burden of HIPCs. They also welcomed the increased poverty-related spending in these countries and commended low-income countries’ efforts made toward poverty alleviation. Most HIPCs have qualified for debt relief and reached the completion point. Directors considered that the objectives of the initiatives have been largely achieved. Nevertheless many HIPCs continue to face other challenges in meeting the Millennium Development Goals, and several of them are still at high risk of debt distress.

Directors noted that some issues require continued attention in order to implement the initiatives fully. Sustained efforts are needed to bring the remaining seven countries,² particularly the pre-decision-point HIPCs, to the completion point. A number of Directors also highlighted the need for careful consideration, in due course, of the options for potential debt relief for Zimbabwe. Full participation of all creditors—particularly a number of smaller multilateral, non–Paris Club bilateral, and private creditors—is yet to be secured. Limiting the incidence and impact of commercial creditor litigation against HIPCs remains important. Finally, additional funds will need to be mobilized to ensure that there are adequate resources for debt relief to all remaining HIPCs, including those having protracted arrears to international financial institutions.

Directors supported the proposal to streamline reporting of progress under the HIPC Initiative and MDRI. Most Directors agreed that the annual status-of-implementation report should be discontinued while some Directors wanted to retain a streamlined version of the report. Directors agreed that the core information—on debt service and poverty reducing expenditure, the cost of debt relief, creditor participation rates, and litigation against HIPCs—should continue to be made available and updated regularly on the IMF and World Bank websites.

Directors welcomed the proposal to enhance the monitoring of, and reporting on, the debt situation in all low-income countries, including HIPCs, through a periodic report, drawing on annual debt sustainability analyses and other pertinent information. They considered this important, in view of the significant share of low-income countries with elevated debt distress ratings and the increasing use of non-concessional borrowing in a number of them. In this context, Directors stressed the need for continued concessional financing to support countries’ development agendas. Some Directors also called for further consideration of ways to finance low-income countries’ growth-enhancing expenditures in the absence of sufficient concessional resources.

Directors agreed to add an end-2010 indebtedness criterion for eligibility for assistance under the HIPC Initiative, as well as to ring-fence further the list of eligible or potentially eligible countries based on that criterion. In supporting this proposal, most Directors considered that this limited change will reduce moral hazard and bring a further sense of closure to the HIPC Initiative. Directors noted that indication of intent not to take advantage of the HIPC Initiative is not a basis for declaring a country ineligible. At the same time, they observed that the expanded criteria will have the effect of eliminating from eligibility two countries whose authorities have indicated that they do not wish to avail themselves of assistance under the initiative, as well as one country whose external debt is well below the initiative’s thresholds. No other country that has been identified as potentially eligible will be affected by this modification to the HIPC Initiative. Some Directors would have preferred maintaining the status quo, to allow countries that currently do not wish to avail themselves of HIPC assistance to retain the option to do so later. Directors recognized that the list of eligible or potentially eligible countries could be amended to include countries whose data are later verified to have met the indebtedness criterion both at end-2004 and end-2010.

Directors generally agreed with the proposal not to include remittances in considering the repayment capacity of HIPCs. They noted that such a change could possibly disqualify from assistance countries that would be eligible under current rules, or lower the amount of assistance to future HIPCs relative to what current post-completion-point HIPCs have received.

¹ The HIPC Initiative was launched by the IMF and the World Bank in 1996 as a comprehensive effort to help 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. The MDRI was launched in 2005 to further reduce the debts of qualifying low-income countries and provide them with additional resources to help meet the Millennium Developments Goals (MDGs). Under the MDRI, four multilateral institutions, including the IMF and the World Bank, provide 100 percent debt relief on eligible claims of countries that reach the completion point under the enhanced HIPC Initiative.

² Chad, Comoros, Côte d’Ivoire, Eritrea, Guinea, Somalia, and Sudan.