Press Release No. 00/81

Press Release: Madagascar to Receive US$1.5 billion in Debt Service Relief: The IMF and World Bank Support Debt Relief for Madagascar under the Enhanced HIPC Initiative

December 22, 2000

The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for Madagascar under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total service relief from all of Madagascar's creditors is worth about US$1.5 billion (US$0.8 billion in Net Present Value (NPV) terms¹), which is equivalent to about 40 percent of total debt outstanding after the full use of traditional debt relief mechanisms.

The impact of HIPC assistance is substantial. Debt service savings will average some US$62 million per year between 2001 and 2019. Debt service as a percentage of government revenue falls from 25 percent in 1999 to 10 percent in 2004 and average about 6 percent during 2010 and 2019. The resources freed up from HIPC assistance will provide crucial support in a number of priority areas outlined by Madagascar authorities in their interim poverty reduction strategy paper (PRSP). In the coming three years, social spending will grow steadily as a percentage of GDP, with spending on education and health care rising to seven times that spent on debt service payments. Particular attention is being directed toward improving access to health and education, rural roads and water and direct support to communities.

IDA will provide HIPC assistance amounting to about US$252 million in NPV terms, which will be delivered over the next 19 years by providing 50 percent relief on annual debt service due. The assistance committed by the IMF of about US$22 million in NPV terms will be delivered over a 7-year period. Both IDA and the IMF will provide interim assistance.

Madagascar will receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfies a number of conditions, including adoption and implementation of a participatory poverty reduction strategy paper (see Annex).

Annex

1. Madagascar

Track record and poverty

After a long period of weal economic performance, Madagascar's economy has recently begun to show improvement: since 1997 growth has averaged about 4 percent a year while inflation has been reduced significantly. These encouraging results are due to the implementation of key reforms aimed at stabilizing the economy, and supporting effective market liberalization.

The impact of these reforms on poverty are only recently taking hold. Since 1997, a small-but significant-decrease in poverty has taken place, reversing the trend during the first seven years of the decade, and there have been similar improvements in social indicators over this same period. Much work, however, remains. The level of deprivation in the economy remains very high, with seven out of ten people living in poverty. Efforts to combat poverty suffered a set back this past year, when the country was hard hit by three cyclones, causing significant damage across a number of sectors. To strengthen the progress achieved in recent years, the government has developed an interim poverty reduction strategy paper (PRSP) to identify the highest priority areas and the most effective approaches to address those needs.

Madagascar will reach its completion point under the Initiative and receive the remainder of its debt relief from all creditors once it has achieved a number of actions designed to strengthen economic growth and reduce poverty. The government of Madagascar expects to complete the full PRSP and take the necessary steps for the completion point by mid-2002.

• Continued commitment of Madagascar to the financial and economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF).
• Completion and satisfactory implementation for one year of a fully participatory PRSP.
• Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including key areas of governance and institutional reform and improved delivery of basic social services.
• Confirmation of the participation of other creditors in the debt relief operation.

General

The HIPC Initiative was launched by the World Bank and the IMF in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced Initiative aims at reducing the NPV of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three-dozen HIPCs are expected to qualify 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 20 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia), with total committed assistance estimated at more than US$32 billion, representing an average NPV stock-of-debt reduction of some 47 percent on top of traditional debt relief mechanisms.

For more information on HIPC, visit:
http://www.imf.org/external/np/exr/facts/hipc.htm
http://www.worldbank.org/hipc/