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1998 IMF Survey Supplement
on the Fund / September 1998
IMF Involvement Emphasizes Guidance and Adequate Financial Support The IMF has played a central role, through its policy guidance and financial support, in helping member countries cope with both official and commercial external debt problems. The IMF’s ultimate objective is to ensure that debtor countries achieve sustainable growth and balance of payments viability and establish normal relations with creditors, including access to international financial markets. While the instruments used have evolved over time, the basic elements of the IMF’s debt strategy continue to be:
The IMF continues to support commercial bank debt- and debt-service-reduction operations on a case-by-case basis. It evaluates proposed packages in light of the strength of the member’s economic policies, the likelihood that the country would regain access to credit markets and attain external viability with growth, and the assurance that the package represents an efficient use of scarce resources. The Executive Board takes into account the appropriate balance between debt- and debt-service-reduction in bank debt packages. It considers whether the resulting debt-service profile on restructured debt is consistent with a country’s likely debt-servicing capacity; whether the package is cost-effective; whether it would imply continued commercial bank involvement, where appropriate, and where it could facilitate a return to normal commercial financing; and whether the menu of options is both balanced and sufficiently broad to ensure a high rate of participation in the package. Official Bilateral Debt Rescheduling Member countries seeking to reschedule their official bilateral debt normally approach the Paris Club. This is an informal arrangement that provides a forum for indebted countries and their official bilateral creditors to work out agreements that generally provide for the rescheduling of arrears and current maturities of eligible debt service falling due during the consolidation period (generally the period of the IMF arrangement), with a repayment period stretching over many years. To ensure that such relief helps restore balance of payments viability and achieves sustainable economic growth, the Paris Club links debt relief to the formulation of economic programs endorsed by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw upon the IMF’s analysis and assessment of countries’ balance of payments and debt situations. Among the 30 middle-income countries that have rescheduled with Paris Club creditors during the last two decades, 24 have graduated from rescheduling, and 3 (Jordan, Peru, and Russia) are expected to graduate at the end of their current consolidation periods. Their exit from rescheduling reflects the significant progress in macroeconomic stabilization and structural reform that contributed to improved access by many middle-income countries to private foreign financing. In contrast, less than one-fourth of the 37 low-income rescheduling countries have graduated from the rescheduling process, reflecting in part the severity of their debt burdens, but also, in many of them, an uneven pace of macroeconomic stabilization and structural reform. Since December 1994, Paris Club creditors have provided concessional reschedulings for low-income countries on “Naples terms,” under which debt service on eligible debt is reduced by up to 67 percent in net-present-value terms. Creditors have also provided exit reschedulings on the stock of eligible debt on Naples terms for low-income countries that have demonstrated a good track record under rescheduling agreements and IMF-supported programs. Sound policies coupled with new concessional financial assistance and these traditional debt-relief mechanisms under Naples terms are expected to allow many indebted low-income countries to achieve debt sustainability over the medium term (namely, that a country’s export earnings, capital, and aid flows are sufficient to service its debt comfortably). Prospects for the remaining low-income countries have been significantly enhanced by the adoption of the Initiative for the Heavily Indebted Poor Countries (HIPC Initiative). In the context of the HIPC Initiative, Paris Club creditors agreed in November 1996 to provide a net-present-value reduction of up to 80 percent under Lyon terms. Also, an agreement was reached in September 1997 on Russia’s participation as a creditor in Paris Club reschedulings. It provides for up-front discounts on Russian claims on rescheduling countries, to make them comparable to claims of traditional Paris Club creditors. This agreement has already facilitated the regularization of Russian claims on developing countries and the implementation of the HIPC Initiative for countries with large debts to Russia. The HIPC Initiative
The Initiative is a comprehensive, integrated, and coordinated approach to external debt that requires the participation of all creditors—bilateral, multilateral, and commercial. It is consistent with past approaches and, indeed, reinforces them, in that debt relief by the international community is linked to the adoption of appropriate policies by the debtor country to help ensure that this relief is put to effective use. Central to the Initiative, therefore, are the country’s continued efforts toward macroeconomic adjustment and its implementation of structural and social policy reforms; social sector reform programs focus primarily on basic health and education. The Initiative is open to all heavily indebted poor countries that are eligible for funding under the IMF’s Enhanced Structural Adjustment Facility (ESAF) and the World Bank’s International Development Association (IDA) and that pursue or adopt adjustment programs supported by the IMF and the World Bank through the fall of 1998. The Initiative will be reviewed in early September 1998, and it is expected to be extended through the end of 2000. The Initiative is set up in two stages. In the first stage, the debtor country pursues a strong adjustment and reform program, supported by the IMF and the World Bank, and receives flow reschedulings on Naples terms from bilateral creditors. The decision point is typically reached after the country has established a three-year policy track record. At this point, the country’s eligibility for assistance under the Initiative is assessed. IMF and World Bank staff, together with the country authorities, analyze the sustainability of the country’s debt burden projected for the completion point (typically, three years later) on the basis of:
To finance the IMF’s participation in the Initiative, the Executive Board established the ESAF-HIPC Trust in February 1997. The IMF will provide its assistance at the completion point mainly through special ESAF grants that will be used to retire obligations falling due to the IMF. In April 1998, Uganda became the first country to reach the completion point under the HIPC Initiative, as performance under its ESAF- and IDA-supported programs remained strong, and Uganda’s other creditors had provided satisfactory assurances of their participation in assistance under the HIPC Initiative. Uganda is receiving assistance equivalent to approximately $350 million in net-present-value terms. This has reduced Uganda’s ratio of net present value of debt-to-exports to 196 percent, well within the 192–212 percent target range agreed at the decision point; the saving in nominal debt service is estimated at nearly $650 million. The IMF’s assistance has already been disbursed to an account owed by Uganda and lowered the present value of its claims on Uganda by about $70 million, representing about $80 million in nominal terms. This will cover about one-fifth, on average, of Uganda’s annual debt service to the IMF over the next nine years. In addition, during 1997/98, five countries reached the decision point: Bolivia and Burkina Faso in September 1997, Guyana in December 1997, Côte d’Ivoire in March 1998, and Mozambique in April 1998. The assistance committed to these five countries at the decision point totals about $2.6 billion in net-present-value terms, which is estimated to reduce debt service in nominal terms by some $5 billion. These five countries are scheduled to reach their completion points under the Initiative at various dates between September 1998 and March 2001. In March and April 1998, the Boards of the IMF and IDA discussed preliminary HIPC documents for Guinea-Bissau and Mali and indicated that the countries were approaching their decision points and could qualify for assistance under the Initiative. Mali is expected to reach its decision point in September 1998. The debt situation of Guinea-Bissau will need to be reviewed once the current conflict has been resolved.
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