Public Information Notice No. 01/100

Public Information Notice: IMF Executive Board discussed the Enhanced HIPC Initiative Completion Point Considerations

September 27, 2001

On September 12, 2001, the Executive Board of the International Monetary Fund (IMF) discussed the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) Completion Point Considerations.

Background

The enhanced HIPC Initiative provides the international community with the option to consider additional debt relief at the completion point to a qualifying debtor country beyond that committed at the decision point if there had been a fundamental change in a country's economic circumstances, and the change was clearly due to an exogenous development. The paper that the Executive Board discussed set out the operational guidelines as to when and how to exercise this option.

So far three countries (Uganda, Bolivia, and Mozambique) have reached their completion points, all with debt indicators below the sustainability targets under the enhanced Initiative. More countries are expected to reach their completion points this year and in 2002.

Executive Board Assessment

Executive Directors recalled that the HIPC framework was designed as a means for achieving a lasting exit from unsustainable debt for eligible countries. They also recalled that the enhanced HIPC framework recognized the ongoing vulnerabilities of HIPCs and thus set the amount of debt relief at the decision point at a significantly deeper level than under the original framework. Directors underscored that the enhanced framework envisaged that a thorough analysis and assessment of the prospects for long-term debt sustainability would be made at the completion point. However, reassessment of the amount of debt relief committed at the decision point would not be automatic. Rather, additional HIPC debt relief could be considered only in exceptional circumstances when there are fundamental changes in a country's circumstances due to exogenous factors. Several Directors stressed that such relief should be truly exceptional, and cautioned that a formalized approach risked raising expectations at a time when financing was constrained. Directors also emphasized, moreover, that focus should remain on continued adherence to sound economic policies, including prudent debt management and appropriate policy response by the HIPC governments to any unforeseen exogenous developments, as that was critical in achieving external debt sustainability.

Directors agreed that the need for additional HIPC debt relief would have to be determined on a case-by-case basis. They acknowledged that it was difficult to foresee and identify ex ante all possible exceptional circumstances that could justify the provision of additional relief under the enhanced HIPC Initiative at the completion point over and above the amounts committed at the decision point. It was also difficult to judge ex ante the impact of exogenous factors and the benefits from any potential corrective government policies. Notwithstanding these inherent constraints, nearly all Directors agreed that the paper provided an appropriate approach for guiding individual country decisions, and endorsed the steps proposed in Box 1 for identifying countries for additional HIPC relief. The view also was held, however, that it was premature to discuss such an approach without addressing first the issue of the financing of additional debt relief. Some Directors indicated the need to interpret these guidelines flexibly to ensure sustainable levels of debt were achieved at the completion point for countries with sound policies. At the same time, some Directors stressed that greater emphasis should be placed upon identifying the exceptional country circumstances that could justify additional relief.

As noted, several Directors expressed concern that the elaboration of the operational procedures might unduly raise expectations for additional debt relief at the completion point, and create perverse incentives with regard to policy implementation. Directors emphasized the importance of monitoring HIPCs' debt situation closely during the interim period to avoid the build-up of unsustainable debt at the completion point. Directors noted the need to ensure that the provision of additional relief at the completion point did not raise issues of moral hazard by inadvertently encouraging HIPCs to borrow excessively between the decision point and the completion point. Directors were also concerned that creditors might be reluctant to lend if they might be called upon to provide additional assistance at the completion point. There was general agreement that these concerns could best be addressed through borrowing limits that are routinely monitored under PRGF-supported programs, and by making it clear that there would be no automatic access to additional assistance.

Nearly all Directors favored using the debt thresholds already established in the enhanced HIPC framework (NPV of debt to exports ratio of 150 percent, or NPV of debt to fiscal revenues ratio of 250 percent) as criteria for determining the amount of additional relief where this was justified by exceptional country circumstances. They agreed that burden sharing should be based on the creditors' exposure after both enhanced HIPC relief and additional bilateral debt reduction. They also agreed that the procedures for additional assistance should provide for unconditional relief once satisfactory financing assurances have been received.

Finally, Directors stressed that the Fund needs to assess the prospective cost of the additional HIPC debt relief and that additional sources of finance would need to be identified. They asked that the staff provide the Board with estimates of the cost of additional assistance when individual country cases were identified as likely candidates for additional assistance.