Multilateral Debt Relief Initiative —
Questions and Answers

Which countries are eligible for the MDRI? Which have already qualified?

All countries that reach the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) are eligible for the MDRI. Moreover, to comply with the requirement, specific to the IMF, that the institution's resources be used in an evenhanded manner across its membership, the IMF Executive Board agreed that all member countries (including non-HIPCs) at or below the per capita income threshold of US$380 should also be eligible. (See Table 1, below)

As of January 2006, twenty countries were eligible for immediate MDRI relief:

• 18 countries that were already past the completion point under the HIPC Initiative (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia); and
• two non-HIPC countries that were below the US$380 per capita income threshold for eligibility and have debt outstanding to the IMF (Cambodia and Tajikistan).

In December 2005, IMF staff prepared an assessment of whether these countries effectively qualified for MDRI relief (see Press Release No 05/286). As requested by the Executive Board, the assessment was based on these countries' current performance in the areas of macroeconomic policies, poverty reduction, and public expenditure management. All but Mauritania qualified for and received full debt relief, amounting to US$3.3 billion, on January 6, 2006 (see Table 2, below).

Other HIPCs will be eligible for MDRI debt relief once they reach the completion point under the HIPC Initiative:

• 10 countries have begun to receive assistance under the HIPC Initiative (they have reached the decision point) but have not yet completed the process (Burundi, Cameroon, Chad, Democratic Republic of Congo, The Gambia, Guinea, Guinea-Bissau, Malawi, Sao Tome and Principe and Sierra Leone). These countries will receive MDRI relief once they reach completion point under the HIPC Initiative.
• Other members are potentially eligible for HIPC assistance under the extended sunset clause of the Initiative. That list is currently being established on the basis of end-2004 debt data.¹

Why was Mauritania found not to qualify yet for the MDRI?

Mauritania is eligible for debt relief under the MDRI but is not in a position to qualify immediately for debt relief because its macroeconomic performance and the management of public finances have substantially deteriorated since an assessment made in June 2002, when the country reached its completion point under the Heavily Indebted Poor Countries Initiative.

The IMF will work closely with the authorities in the coming months to help Mauritania qualify for MDRI debt relief, including through a six-month program that would be monitored by IMF staff in order to determine that Mauritania could qualify for MDRI relief after certain remedial actions are taken. In addition to sound macroeconomic policies over a period of six months, these would include actions in the areas of budget formulation, execution, and reporting, and the resolution of data issues with the Fund.

Do the IMF decisions on the MDRI affect IDA and the AfDF? Can the IMF proceed to offer debt relief to countries even if the IDA and AfDF have not approved their packages?

The IMF started delivering debt relief in January 2006. While the staffs of the IMF and the World Bank cooperate in the assessment of eligible countries, the decision to grant debt relief is ultimately the responsibility of each institution. IMF decisions do not affect IDA or AfDF decisions, and vice versa. IDA and the AfDF are expected to finalize their own debt relief packages in the next few months.

Will the same countries be eligible for debt relief from IDA as from the IMF? What about Cambodia and Tajikistan, in particular?

Unlike IDA and the AfDF, the IMF is expected to use its own resources to provide debt relief under the MDRI. Because IMF resources must be used in an evenhanded manner across the membership, the IMF Executive Board decided that they should be used to provide debt relief to all members at or below the per capita income threshold of US$380—thus including the two non-HIPC countries, Cambodia and Tajikistan. HIPCs above the income threshold will receive debt relief from bilateral contributions currently administered by the IMF.

Since the resources used by IDA to provide debt relief are not subject to the same requirement of uniformity of treatment as the IMF resources, Cambodia and Tajikistan—which are non-HIPC countries, and therefore were not targeted under the initial G-8 proposal—are not expected to receive debt relief from IDA. However, they may benefit from the increased resources being allocated by IDA to all low-income countries in the context of the MDRI. The implementation modalities of the MDRI in IDA and the AfDF are not yet finalized.

How much debt relief will countries receive in total from the IMF? How will the IMF finance it?

The debt relief provided by the IMF to the initial group of 19 qualifying countries amounts to SDR 2.3 billion (about US$3.4 billion). The total cost of the MDRI for the IMF, however, is estimated at SDR 3.5 billion (about US$5 billion; figures are in end-2005 NPV terms), excluding potential sunset clause HIPC countries and the protracted arrears cases. Thus, the ultimate cost will depend on when and which eligible countries qualify for debt relief.

The IMF will finance this cost through three main sources (rounded):

• The IMF's own resources will be used to provide MDRI relief to all countries (HIPC or not) with per capita incomes below US$380, in line with the principle of uniformity of treatment. To this end, the IMF will use about SDR 2.0 billion (US$2.9 billion) in profits from the 1999-2000 off-market sales of the Fund's gold, which will be transferred to a special trust, the "MDRI-I Trust."
• For HIPCs with per capita incomes above US$380, MDRI relief will be financed through transfers to another trust, the "MDRI-II Trust," of existing bilateral contributions provided to the Subsidy Account of the Poverty Reduction and Growth Facility (PRGF) Trust. These are currently estimated at SDR 1.1 billion (US$1.6 billion). Additional contributions to this Trust will likely be needed to cover all potentially eligible countries (see below)
• The remainder of the debt relief, about SDR 0.3 billion (US$0.5 billion), will be met through resources already earmarked under the HIPC Initiative.

How does this affect IMF finances, in particular with regard to other support for low income countries, such as the PRGF? Does this mean that in the future the IMF will only provide grants? If not, why not?

Concessional PRGF lending depends on the availability of subsidies in the PRGF Subsidy Account, some of which will be transferred to finance debt relief under the MDRI. Donors have agreed to provide the additional resources necessary so that the IMF's financial capacity is not undermined by this initiative. The IMF staff's preliminary estimate is that additional subsidy contributions of over SDR 223 million (over US$320 million, in 2005 NPV terms) would be needed to allow the IMF to lend all remaining PRGF loan resources to low-income countries at the PRGF concessional interest rate. The IMF will continue to support low income countries through its available instruments, including loans—rather than through grants—under the PRGF and newly approved Exogenous Shocks Facility (ESF), and through the nonfinancial Policy Support Instrument (PSI).

What is the basis for the cut-off point of US$380 on income in order to qualify for debt relief?

The principle of uniformity of treatment applies to all use of the IMF's resources, including the resources held in the Special Disbursement Account (SDA), whose use is envisaged under the MDRI. This principle does not require that members be treated identically, but that IMF decisions that differentiate among members be based on the consistent application of relevant criteria.

One of the criteria that is relevant for countries' use of SDA resources is per capita income. A US$380 per capita income cutoff fits closely the financial arrangements contemplated under the initial G-8 proposal (which covered 35 HIPC countries) while ensuring uniformity of treatment. It also matches the level that is widely associated with a poverty line (an income of about one dollar per day). SDA resources will be used to provide debt relief under the MDRI to member countries below that income cutoff (HIPC and non-HIPC countries). A pool of funds originally contributed by 43 member countries and held in the PRGF Subsidy Account will be used in large part to provide MDRI debt relief to HIPCs that have per capita incomes above that threshold.

Is there any conditionality attached? Did countries that had already reached the completion point under the HIPC Initiative have to meet new conditions?

To benefit from MDRI debt relief, countries that had already reached the completion point under the HIPC Initiative had to demonstrate sound policies and satisfactory standards of governance. Two basic principles guided the assessment of eligible countries: (i) conditionality for debt relief under the MDRI should be consistent across members; and (ii) conditionality should not go beyond that of the HIPC Initiative, in line with what the G-8 initially envisaged. Taken together, these two principles suggested that an eligible HIPC country that had already reached its completion point would qualify for MDRI relief if its performance in three key areas had not substantially deteriorated since the completion point. These were: (i) macroeconomic performance; (ii) implementation of a poverty reduction strategy; and (iii) public expenditure management systems. Eligible non-HIPC countries (Cambodia and Tajikistan) also had to show a record of satisfactory performance in the three areas mentioned above.

Countries that have not yet reached the completion point will qualify automatically for MDRI debt relief once they do reach it.

There are still many extremely poor countries that are not receiving 100% debt cancellation. Why?

The objective of the G-8 proposal, on which the MDRI was modeled, was to complete the process of debt relief for HIPCs by providing additional resources to help these countries reach the U.N. Millennium Development Goals (MDGs), which target a halving of poverty by 2015. The proposal has been adapted in the IMF to meet the requirement, specific to the IMF, of evenhanded access to the institution's own resources. Per capita income was chosen as the relevant criterion of eligibility for debt relief from the IMF's own resources. Current resources allow the IMF to provide relief to members with per capita income at or below US$380. Additional resources would be needed to provide relief to a larger group of beneficiaries.

How do we know that the money saved on debt service is being used for poverty-reducing measures and helping countries to reach the MDGs?

Countries that qualify for MDRI relief will have demonstrated sound policies and adequate governance before receiving this relief, providing comfort that the resources freed by debt relief will be used productively to help them advance toward the MDGs.

The Executive Board called on the staffs of the IMF and the World Bank to cooperate and coordinate in the implementation of the MDRI, including in monitoring and reporting on MDG-related spending after provision of debt relief. IMF Executive Directors requested that a progress report on the implementation of the MDRI be presented to the Board before the 2006 Spring and Annual Meetings. Subsequently, MDRI status reports will be prepared in conjunction with the regular joint Bank-Fund HIPC Initiative status reports.

How much closer to reaching the MDGs will the debt relief put the target countries?

The MDRI will allow low-income members to allocate resources to poverty-reducing and human development expenditures. It will therefore help these countries meet the MDGs. The impact will differ from country to country, depending on their level of indebtedness to the IMF, IDA, and the AfDF, but also their capacity to absorb efficiently additional expenditures.

Will the MDRI change the way the IMF deals with its low-income members?

IMF debt relief under the MDRI is part of an effort to strengthen the IMF's role in supporting its low-income members. The IMF is fully committed and equipped to continue advising and assisting members in the design of macroeconomic stabilization policies and structural reforms, in capacity building, and in providing financing when needed. The PRGF remains the main instrument for the IMF to assist low-income countries that need Fund financing. The IMF has also introduced two new instruments that will help respond to the needs of its members: the Policy Support Instrument (PSI) and the Exogenous Shocks Facility (ESF).

¹More information on countries eligible under the sunset clause can be found in the HIPC progress report of August 2005 – http://0-www-imf-org.library.svsu.edu/external/np/pp/eng/2005/081905.pdf.