Press Release No. 10/15

Press Release: IMF and World Bank Announce US$1.6 Billion in Debt Relief to Afghanistan

January 26, 2010

The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed to support US$1.6 billion in debt relief for the Islamic Republic of Afghanistan.

The Boards of Directors of both institutions agreed that the country has taken the necessary steps to reach the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Afghanistan becomes the 27th country to reach the completion point under the Initiative. This will generate total debt service savings of US$1.6 billion, which include US$1.3 billion from the HIPC Initiative, US$260 million from Paris Club creditors beyond HIPC, and US$38.4 million from the Multilateral Debt Relief Initiative (MDRI).

To reach the completion point, Afghanistan carried out a number of important reforms despite an extremely challenging environment characterized by insecurity, a food crisis, and a difficult political situation. These reforms included actions to begin implementing Afghanistan’s National Development Strategy (ANDS), maintain a stable macroeconomic environment, and enhance debt management.

In addition, the authorities have made progress in public financial management, mining sector reforms, and transparency and accountability in health and education services. Based on strong commitments going forward, the Government of Afghanistan was granted waivers for two completion point triggers on pension reform for public employees and the military, and the restructuring of four key service delivery ministries, both of which had been substantially implemented. Reforms under the HIPC Initiative are expected to mobilize additional resources and support the country’s reconstruction and poverty reduction, helping to place it on a sustainable path.

“The Afghan government has demonstrated a very strong commitment to an ambitious reform program since it reached its HIPC decision point in 2007,” said Nicholas J. Krafft, World Bank Country Director for Afghanistan. “This is a very commendable achievement given the deteriorating security situation and political uncertainty over the recent election year. On a cautionary note, even after HIPC debt relief Afghanistan will remain a country under high risks of debt distress due its reliance on donor funding.”

“The authorities should be commended for their efforts amid a very difficult environment,” said Enrique Gelbard, the IMF mission chief for Afghanistan. “Alongside improvements in security, the key challenges going forward will be to raise domestic revenues, invest in infrastructure, and press ahead with the implementation of the ANDS to reduce poverty. This will require significant efforts by the authorities as well as substantial and sustained support from donors and multilateral institutions.”

Debt relief under the HIPC Initiative from all of Afghanistan’s creditors amounts to US$582.4 million in net present value (NPV) terms¹. All multilateral and Paris Club creditors, as well as some other official creditors have agreed to participate. Afghanistan is expected to receive the equivalent of US$1.3 billion of debt relief in nominal terms under the HIPC Initiative. In addition, Paris Club Creditors have also indicated that they would provide assistance beyond HIPC relief through 100 percent stock-of-debt cancellation, estimated at about US$260 million in nominal terms.

Upon reaching the completion point, Afghanistan also qualifies for debt relief under the Multilateral Debt Relief Initiative (MDRI). MDRI relief will lead to a nominal reduction of debt to IDA by US$35 million. Afghanistan does not have any MDRI eligible debt outstanding to the IMF.

The completion point marks the end of a process that included clearance of arrears and debt reductions by Paris Club creditors since 1996 and will ultimately result in a 96 percent reduction of Afghanistan’s external debt, equivalent to US$11 billion in NPV terms.²

Annex (Note to Editors)

Afghanistan is one of the poorest countries in the world. Per capita income is estimated to have been about US$425 in 2008, and Afghanistan ranks well behind its neighbors on most human development indicators. However, there has been progress in recent years toward Afghanistan's political, economic, and social transformation. Performance under the ongoing arrangement supported by the IMF's Poverty Reduction and Growth Facility has been satisfactory, and the country has implemented substantial reforms on key areas identified at the time of the decision point under the HIPC initiative in 2007. This facilitated a progressive regularization of relations with creditors though a Paris Club rescheduling agreement in July 2007 and the approval of the ANDS in 2008.

The HIPC Initiative

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:

• Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;

• Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster; and

• Stronger Link between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 35 HIPC countries have reached their decision points, of which 27 (including Afghanistan) have reached completion point.

The MDRI

At the July 2005 G8 Summit in Gleneagles, Scotland, G8 leaders pledged to cancel the debt of the world’s most indebted countries, most of which are located in Africa. The aim of this Multilateral Debt Relief Initiative (MDRI) was to reduce further the debt of HIPCs and provide additional resource to help them reach the Millennium Development Goals (MDGs).

The MDRI is separate from the HIPC Initiative but linked to it operationally. Under the MDRI, three multilateral institutions – the World Bank’s International Development Association, the International Monetary Fund and the African Development Fund provide 100 percent debt relief on eligible debts to countries having reached the HIPC completion point. Unlike the HIPC Initiative, the MDRI is not comprehensive in its creditor coverage. It does not involve participation of official bilateral or commercial creditors, or of multilateral institutions other than the above-mentioned three.

¹ Net present value of debt is the discounted sum of all future debt service obligations (interest and principal).

² In March 2006, Afghanistan’s debt was equivalent to US$11.6 billion in net present value terms. In June 2006, Paris Club creditors provided a debt relief through a flow treatment under Naples terms, including an up-front 80 percent discount on Russian debt disbursed before 1992.