Covering Memorandum by the President of the World Bank and the Acting Managing Director of the IMF on the Heavily Indebted Poor Country (HIPC) Initiative and Poverty Reduction Strategy Papers (PRSP) - Progress Reports
April 14, 2000
Background Note on the Timetable for the Implementation of the Initiative for the Heavily Indebted Poor Countries(HIPCs)
Heavily Indebted Poor Countries (HIPCs) Initiative—A Progress
Prepared by the Staffs of the World Bank|
and the International Monetary Fund
April 14, 2000
Table of Contents
1. In September 1999, the Development and Interim Committees endorsed—subject to the availability of funding—the enhancements to the HIPC Initiative framework to provide deeper, faster and broader debt relief for countries pursuing sound policies and committed to reform. The lower debt sustainability thresholds and earlier calculation of assistance under the enhanced framework will more than double the amount of debt relief provided by the HIPC Initiative compared to the original framework. The World Bank and the IMF have been moving forward with the implementation of the enhanced framework. Since the Annual Meetings, missions visited about 20 countries to prepare debt sustainability analyses and to help countries initiate the Poverty Reduction Strategy Paper (PRSP) process. To date, five countries—Bolivia, Mauritania, Mozambique, Tanzania, and Uganda—have reached their decision points under the enhanced framework. In addition, the debt relief package for Senegal has been prepared based on agreements with the outgoing government and staffs hope, after consultations with the incoming administration, to be in a position to submit this package to the Boards shortly. Furthermore, two preliminary HIPC documents on Honduras and Guinea have been presented to the Executive Boards of the IDA and the IMF discussing relief under the enhanced Initiative. In moving forward, much work remains to be done to identify sufficient resources to finance the increased costs of the enhanced HIPC Initiative.
2. With the endorsement of the enhanced HIPC Initiative in place, staffs proceeded to reassess the retroactive cases—i.e., those countries that had already reached their decision points under the original framework—to determine additional assistance under the enhanced HIPC Initiative. Of the four countries that had already reached their completion points under the original framework, Uganda and Bolivia reached their new decision points under the enhanced framework in February 2000, while Mozambique's debt relief package was approved in April 2000.1 A key requirement for reaching the floating completion points for these countries is the adoption of a fully developed PRSP and its broad endorsement by the Executive Boards of the IDA and the IMF as a context for assistance from IDA and the IMF. For Uganda, the completion point document under the enhanced HIPC Initiative has been issued to the Boards of the Fund and IDA for discussion at a forthcoming meeting. As part of a wider response to the severe rains and floods which have hit Mozambique, IDA and the IMF have acted to accelerate the delivery of debt relief, covering Mozambique's debt service to the Bretton Woods Institutions during the next 12 months, coinciding with the expected interim period. Debt service relief from the HIPC Initiative for these three countries will total around US$8.4 billion, or US$4.3 billion in net present value (NPV) terms. Table 1 provides details of the status of country cases considered thus far under the Initiative, and the likely amounts of assistance by major creditor.
3. Senegal's debt was considered sustainable under the original HIPC Initiative framework. With the lower thresholds and targets under the enhanced framework, Senegal would qualify for assistance. The debt relief package has been prepared and will be circulated to the Boards as soon as the new government has confirmed its commitment to the economic and social policies underpinning the proposed HIPC package. Other retroactive cases—including Benin, Burkina Faso, and Mali—will be coming up for reassessment in the coming months.
4. Four new cases have been considered by the Executive Boards of IDA and the Fund under the enhanced HIPC Initiative since the annual meetings. Two of these cases reached their decision points, and the Executive Boards of IDA and the Fund discussed Preliminary HIPC Documents for the other two cases.
5. The Executive Boards of IDA and the IMF agreed in early 2000 that Mauritania is eligible for assistance of US$1.1 billion in nominal terms under the fiscal criterion (US$622 million in NPV terms). In April 2000, the Executive Boards of the IMF and IDA agreed that Tanzania had reached its decision point under the enhanced HIPC Initiative and approved assistance of US$3 billion in nominal terms (or about US$2 billion in NPV terms). Between the decision and completion points, IDA and the Fund will provide interim relief.
6. In these new cases the "floating" completion point would be triggered by the successful implementation of a set of pre-defined reforms in the macroeconomic, structural and social domains. In particular, both Mauritania and Tanzania will (i) prepare, in broad consultation with civil society, a fully developed PRSP, which is endorsed by the Executive Boards of IDA and the IMF as a context for assistance from IDA and the IMF (ii) produce an annual progress report on its implementation,2 (iii) maintain a stable macroeconomic environment, as evidenced by performance under a PRGF program, and (iv) implement satisfactory structural reforms as defined in the decision point document. The PRSPs will serve as a basis for future concessional assistance from the IMF and IDA. In all cases, assistance at the completion point is subject to confirmation of comparable action by other creditors.
7. In December 1999, the Executive Boards of IDA and the IMF discussed preliminary documents on the HIPC Initiative for Honduras 3 and Guinea 4. Honduras would qualify under the Enhanced HIPC Initiative based on the fiscal criterion, and Guinea would qualify under the exports criterion. The decision points for these two countries could be reached in 2000 subject to: (i) preparation of an interim PRSP and (ii) progress on key macroeconomic and structural reforms as outlined in the preliminary HIPC documents. These countries could potentially receive nominal debt service relief in the order of US$2 billion.
8. In December 1999, the staffs of the World Bank and the IMF prepared jointly an update on costing the enhanced HIPC Initiative, including a breakdown of the costs for each multilateral institution. Updated total costs for the HIPC Initiative were estimated at US$28.2 billion in 1999 NPV terms (see Table 2). Under the enhanced framework, the shares of HIPC Initiative costs for bilateral and multilateral creditors remain roughly equal. In 1999 NPV terms, multilateral cost estimates are as follows: US$6.3 billion for the World Bank, US$2.3 billion for the IMF, US$2.2 billion for the AfDB, US$1.1 billion for the IaDB, and US$2.2 billion for other multilateral development banks (MDBs).
III. Participation of All Creditors under the Enhanced HIPC Initiative Framework and Financing Issues
9. Successful implementation of the enhanced HIPC Initiative will depend on the full participation of multilateral as well as bilateral creditors; and the availability of adequate financing to meet multilateral institutions' costs as the Initiative moves forward. Since the endorsement of the enhanced framework in September 1999, staffs have been working with donor governments and with MDBs to bring these conditions into place.
World Bank Participation and Financing
10. In its endorsement of the enhancement of the HIPC Initiative framework, the Development Committee agreed that financing of debt relief should not compromise the financing made available through concessional windows such as IDA. Following the Annual Meetings, Bank management, in consultation with donors and the Executive Directors and taking into account both the level and timing of resources projected to be available to the HIPC Trust Fund to support debt relief, developed specific implementation modalities for the provision of debt relief by the World Bank and the operation of the HIPC Trust Fund under the enhanced framework.5 In January 2000, IDA's Executive Directors approved these modalities and adopted a decision that the forgiveness of a portion of the debt service on IDA credits as it falls due is consistent with IDA's Articles of Agreement.
11. The predominant method of delivering debt relief on IDA debt will be through debt service relief. Because the World Bank component of the HIPC Trust Fund will not have sufficient resources to provide full financing of debt relief commitments at the point the commitment is made, IDA, rather than the HIPC Trust Fund, will assume the responsibility of providing the debt relief at the time of the commitment (i.e., at the decision point). IDA will be reimbursed on a pay-as-you-go basis by the World Bank component of the HIPC Trust Fund (subject to the availability of resources in that component)—the Trust Fund will provide to IDA annual amounts that match the amounts forgiven by IDA during the same period. IDA will deliver, to the extent feasible, its full share of debt relief to the country within 20 years after the decision point. Within this objective, IDA will provide annually relief of not less than 50 percent of IDA debt service due on the amounts disbursed and outstanding at the reference year when HIPC assistance is calculated. IDA debt relief will begin at the decision point, with the maximum level of debt relief provided during the interim period equal to one third of the total NPV to be provided to the country by IDA.
12. For the three countries with significant outstanding IBRD debt (Côte d'Ivoire, Cameroon, and Honduras), to the extent that donor funding is not available in the World Bank component of the HIPC Trust Fund, debt relief on IBRD loans will have to be provided by IDA. IDA will during the interim period provide annually supplemental HIPC debt relief grants to cover the debt relief that will be provided on IBRD loans. At the completion point, IDA would provide a single supplemental HIPC debt relief credit to prepay the amount of IBRD debt outstanding required to achieve the remaining NPV relief to be provided on the country's IBRD debt.
13. In keeping with the understanding embodied in the Development Committee communiqué, IDA's debt relief costs will be clearly and separately identified—the amount of debt service that IDA forgives and the amount of IDA supplemental debt relief grants and credits it provides will be known. At this time the resources available in the HIPC Trust Fund fall far short of the total costs that will be incurred by IDA. The IDA 13 replenishment is therefore expected to consider (i) the normal financing requirements for IDA to carry out its development objectives and (ii) IDA's unfunded HIPC costs. It will then be up to the donors to decide how to fund these separate IDA HIPC Initiative costs and how they will share the burden. The implications of HIPC debt relief for IDA and the process for mobilizing resources will be discussed at the mid-term meeting of IDA Deputies in June 2000.IMF Participation
14. The IMF provides HIPC debt relief through special operations of the PRGF-HIPC Trust. Following IMF and IDA Board approval of the HIPC Initiative decision point document, and subject to receipt of satisfactory financing assurances from other creditors, the IMF commits to deliver HIPC Initiative assistance in the form of grants which are paid into the country's account, administered by the IMF as Trustee, and used to help meet its debt service payments to the IMF.
15. Beginning in the decision point year, a country may receive as much as 20 percent of total IMF assistance each year between the decision and completion points, up to the total of IMF debt service due by the country to the IMF each year, with interim assistance not to exceed 60 percent of overall IMF assistance. The balance of committed assistance, including interest on amounts committed but not disbursed during the interim period, is delivered at the completion point.6
16. The schedule for the use of these grants to meet a country's debt service payments to the IMF is agreed with the country with the objective of easing the country's debt service burden. The delivery profile thus reflects country-specific considerations including the profile of total debt service obligations and the degree of front-loading desired given the state of preparation of a country's PRSP, its poverty reduction spending needs, and its absorption capacity.Status of Financing of PRGF-HIPC Trust
17. The total cost to the IMF of participation in the HIPC Initiative and the continuation of concessional lending under the Poverty Reduction and Growth Facility (PRGF) is estimated at US$3.7 billion in end-1999 NPV terms, with the HIPC Initiative accounting for two-thirds of the total. The financing package consists of pledged contributions by member countries of US$1.5 billion in end-1999 NPV terms and contributions by the IMF of US$2.2 billion in end-1999 NPV terms.
18. On December 8, 1999, the IMF Executive Board took the decisions necessary to enable many bilateral contributors and the IMF to make their contributions to the PRGF-HIPC Trust, including termination of the IMF's Second Special Contingency Account (SCA-2) and approval of off-market gold transactions by the IMF of up to 14 million ounces. Since then, the IMF has made substantial progress in securing the necessary financing. About 60 percent of pledged contributions have either been received or are being contributed on the basis of an agreed schedule of contributions. As to the IMF, the bulk of its contribution, US$1.7 billion in end-1999 NPV terms, will come from the investment income on the profits generated from off-market gold transactions, which were completed in early April 2000. The IMF will also provide US$0.5 billion in end-1999 NPV terms from other sources, of which about 40 percent has already been contributed to the PRGF-HIPC Trust.
19. So far, the IMF's Executive Board has authorized the transfer of nine-fourteenths of the investment income on profits from gold sales to be used for the benefit of the HIPC Initiative. The transfer of the remaining five-fourteenths requires a decision by the IMF's Executive Board with an 85 percent majority. Further legislation by the United States Congress is necessary for the Executive Director of the United States to support such a decision. Without these final steps, there will be a shortfall in resources available for debt relief under the HIPC Initiative of about US$580 million in end-1999 NPV terms.
20. In order to facilitate the internal deliberations within individual institutions, staffs have produced detailed estimates for each MDB of their costs, along with illustrative scenarios for delivering their share of assistance. Contacts have continued with individual multilateral creditors on a regular basis. Staffs have held numerous bilateral technical meetings with MDBs 7, to discuss ways and means of participation in the enhanced framework. The OPEC Fund co-hosted a meeting of Arab MDBs together with the Bank, and the Bank hosted its semi-annual meetings with MDBs in October 1999 and in early April 2000.
21. Overall, a majority of institutions indicated their continued support for the HIPC Initiative, and in addition, the favorable position taken by managements of their institutions with regard to participation in the enhanced HIPC Initiative framework. Besides the World Bank and the IMF, 8 of 17 institutions8—BOAD, CABEI, EIB, EU, IaDB, IFAD, NDF 9, and NIB—were able to report confirmation by their decision making bodies of participation in the enhanced HIPC Initiative framework, although several of these will need significant donor assistance in order to deliver their share of debt relief, consistent with their financial integrity.
22. The African Development Bank (AfDB) remains committed to the principles of the HIPC Initiative and has scheduled a Board meeting in April/May to seek approval for its participation in the enhanced HIPC. The OPEC Fund and the Arab Bank for Economic Development in Africa (BADEA) have indicated their agreement in principle to participate in the enhanced framework, subject to the agreement of their governing bodies.10 CAF reiterated its commitment to the HIPC Initiative and expressed its willingness to explore modalities of participation recognizing its financial limitations and the need for donor participation. Other MDBs, such as the Islamic Development Bank and ECOWAS Fund, are still in the process of exploring their options internally and with their shareholders. However, there are also a couple of multilateral institutions which have not been participating in the MDB process, and more work remains to achieve their full participation in the HIPC Initiative.
23. During the April MDB meetings, the Bank facilitated meetings between MDBs that will likely require assistance to deliver their full share of relief and representatives of potential donor countries. These information-sharing meetings highlighted the predicament of these MDBs in meeting their share of the costs from internal resources while trying to maintain their financial integrity, and were a good starting point for future dialog between donors and MDBs. Collaborative work will continue with MDBs with a view to resolving key participation and financing issues.Status of HIPC Trust Fund Financing for MDBs
24. During the 1999 Annual Meetings, it was recognized that a number of multilateral creditors would need supplementary financing to enable them to cover their full costs of participating in the Enhanced HIPC Initiative. Since that time the World Bank has continued discussions with existing and potential donors to secure existing pledges and mobilize additional contributions.11 All donors that had pledged during the Annual Meetings have reconfirmed their pledges and additional pledges have been received from Canada, Japan, New Zealand, and Spain. A total of $2.1 billion in donor pledges have been received bringing overall contributions and pledges to $2.4 billion (see Table 3). Contribution agreements have been signed or are currently being finalized with Australia, Canada, the European Commission, Germany, Netherlands, New Zealand, and the United Kingdom.
25. In terms of financing the cashflow requirements of the HIPC Initiative, these pledges, and the funding to be made available from the internal resources of the MDBs, need to be converted into a potential annual stream of funding. This resulting stream should then be compared with the financing requirements emanating from the country cases brought forward under the Initiative. The match between these two streams is a function of a number of key variables: the timing of the country cases brought to Decision and Completion points on the one side, and on the other, the timing and fungibility of donor commitments; the capacity of other MDBs to mobilize internal resources to finance debt relief; and the modalities through which they would deliver such relief. All of these need to be further discussed and validated with the institutions concerned, which are still exploring these matters with their own management and shareholders. Under the most favorable set of assumptions, with strong internal resource mobilization on the part of the MDBs, current donor contributions and pledges would cover the initial years of the currently expected debt service costs of the MDBs. However, some donors have indicated that there might be limitations on how flexibly their contributions could be used and a number of MDBs are still concerned about proceeding on a less than full upfront financing basis. If these limitations materialize, aggregate financing problems could arise much sooner: in some scenarios to as early as late 2000. Moreover, should some MDBs facing financing shortfalls, there could be a slowing down of the consideration of specific early country cases.
26. The above reinforces the need to continue to move in a determined fashion to ensure full financing for the enhanced HIPC framework. The international community will need to secure substantial additional resources to make good the political commitments which government leaders have made. The resource mobilization effort will also clearly need to be sustained for a long time. The staff of the Bank and Fund are working with officials of donor countries/agencies and will continue to report on progress in this important area.
27. The Executive Boards have considered the participation of official bilateral creditors in providing debt relief, and in particular the difficulty encountered by HIPCs in securing comparable treatment from non-Paris Club creditors. Since a key principle underlying the HIPC Initiative is that action should be coordinated among all creditors involved with broad and equitable participation, the inability of most HIPCs to secure comparable relief from non-Paris Club bilateral creditors threatens to compromise the debt sustainability of these HIPCs. The Boards recognized the diversity of creditors and emphasized that such issues should be addressed flexibly on a case-by-case basis in conformity with this general principle. Directors emphasized that it will be important that workable solutions be found to this problem, and encouraged further efforts by donors and other creditors to assist poorer creditors—particularly HIPCs.
28. While it is expected that potentially up to 20 countries could qualify for debt relief this year, timing depends significantly on progress made toward developing nationally led and outcome-oriented poverty reduction strategies. At the same time, securing sufficient funding to cover the increased costs of the enhanced framework will become more and more urgent. Over the coming year, countries that are expected to reach their completion point are Bolivia (under the enhanced framework), and Burkina Faso, and Mali (under the original framework). Besides those already listed earlier, and subject to country specific developments, decision points under the enhanced HIPC Initiative framework could be reached in 2000 for Cameroon, Chad, Guinea-Bissau, Guyana, Malawi, Nicaragua, Rwanda, and Zambia. In addition, staffs expect to bring Cameroon, Chad, Malawi, Niger, Rwanda, and Zambia to the Executive Boards for preliminary assessment of eligibility under the enhanced HIPC framework. Annex I provides a background note on the HIPC Initiative Timetable, including a revised timetable for HIPC Initiative country documents through end-2000.
29. Bank and Fund staff will prepare another progress report on the implementation of the enhanced HIPC Initiative for the next Annual Meetings of the Development Committee and the International Monetary and Financial Committee in September 2000.
1Guyana, the fourth country that had already reached its completion point under the original HIPC framework is expected to reach its decision point under the enhanced HIPC Initiative once it reaches an agreement on a program under the second annual PRGF arrangement. Additional debt relief under the enhanced HIPC Initiative will be estimated in the context of the revised debt sustainability analysis currently in progress.
2On Tanzania, reflecting its long track record of adjustment and reform, Executive Directors noted that this requirement be interpreted flexibly.
3Honduras: Preliminary Document on the Initiative for Heavily Indebted Poor Countries (HIPC), IDA/R99-183 and EBS/99/210, November 23, 1999.
4Guinea: Preliminary Document on the Initiative for Heavily Indebted Poor Countries (HIPC), IDA/R99-200 and EBS99/226, December 14, 1999.
5(IDA/R2000-4), January 10, 2000.
6The interim period between the decision and completion points may be shorter (or longer) than three years depending on the successful implementation of pre-defined reforms as laid out in the decision point document. The phasing and amounts of grants delivered to the escrow account are set to ensure delivery of the IMFs share in the NPV of total debt relief.
7Including Banque Ouest Africaine de D€veloppement (BOAD), Central American Bank for Economic Integration (CABEI), International Fund for Agricultural Development (IFAD), African Development Bank (AfDB), Inter-American Development Bank (IaDB), Nordic Investment Bank (NIB).
8Attending organizations were: African Development Bank (AfDB); Arab Bank for Economic Development in Africa (BADEA); Asian Development Bank (ADB); CARICOM Multilateral Clearing Facility (CMCF); Central American Bank for Economic Integration (CABEI); Central Bank of West African States (BCEAO); Corporacion Andina de Fomento (CAF); European Commission/European Union (EC/EU); Fund for Cooperation Compensation & Development of the Economic Community of West African States (ECOWAS); Financial Fund for the Development of the River Plate Basin (FONPLATA); Inter-American Development Bank (IDB); International Fund for Agricultural Development (IFAD); Islamic Development Bank (ISDB); Nordic Investment Bank (NIB); Nordic Development Fund (NDF); OPEC Fund for International Development; West African Development Bank (BOAD).
9This is subject to certain amendments to NDFs legal statutes. Although NDF cannot yet undertake a binding financial obligation to participate in the enhanced framework, there is an agreement in principle to participate actively in the enhanced HIPC Initiative.
10For BADEA, participation would be on a case-by-case basis, recognizing the financial constraints in securing sufficient resources.
1IDA/SecM99-679, December 8, 1999, and EBS/99/220, December 7, 1999 entitled "Heavily Indebted Poor Countries (HIPC) Initiative: Update on Costing the Enhanced HIPC Initiative".
2December 22, 1999.