Tentative Costing of Illustrative Alternatives to the HIPC Initiative Framework

Documents about the HIPC Debt Initiative

Tentative Costing of Illustrative Alternatives to the HIPC Initiative Framework
A public information note prepared by the staffs of the
International Monetary Fund and the World Bank

March 3, 1999

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1. The IMF and World Bank have begun a process of consultation on debt relief and the Heavily Indebted Poor Countries (HIPC) Initiative.¹ Staff are now seeking the views of stakeholders including member countries, other multilateral creditors, NGOs, religious groups, and other interested institutions. To this end, a request for comments and proposals on the HIPC Initiative has been posted on the Fund and Bank web sites, and staff are attending conferences in Africa, Europe, Latin America and the United States for further discussions on the Initiative.

2. To help facilitate this consultation and review process, the attached tables provide highly tentative estimates of the costs of changing some key parameters of the current framework of the HIPC Initiative. It must be emphasized that the choice of alternatives for inclusion here does not imply any endorsement by the official community, or by the staff or management of the IMF or the World Bank. Nor is it intended that these these options constitute the range which could be considered. Rather, the alternatives shown are intended to illustrate the kinds of proposals which have been made by NGOs such as Eurodad, Jubilee 2000, Oxfam, and religious groups. None of the alternatives is intended to represent specific proposals made by any organization, including in particular the German Cologne Debt Initiative.²

3. These costing estimates are necessarily rough, and subject to a number of assumptions and caveats. The underlying methodology and assumptions are presented in "The Initiative for Heavily Indebted Poor Countries--Review and Outlook," September 22, 1998. To provide early information, staff has used the database developed in preparation for the costing analysis presented in that paper, which in turn was based on joint debt sustainability analyses (DSAs) available at that time. Limitations of this analysis are noted in the following points, the first three of which suggest that these tentative costings may underestimate current and alternative costs:

Declining commodity prices are likely to reduce export prospects for many HIPCs. Non-energy commodity prices declined by 13 percent between the fourth quarter of 1997 and 1998, and prices are projected to remain depressed over the next several years.³ While individual country experiences will differ based on the mix of exports, the next round of DSAs is likely to include lower exports for a number of countries.⁴

Discount rates have declined over the past year, tending to increase the present value of debt as calculated in individual DSAs.

It is likely that some of the alternative frameworks presented in this note-particularly as they diverge from the current framework-would potentially provide debt relief to countries which have not been classified as HIPCs. However, staff has not been able to assess these costs since the database includes only 41 countries.⁵

It is not possible to provide a breakdown of bilateral and multilateral costs in the current note since the database contains this debt breakdown only for those countries whose DSAs have indicated they would be eligible for assistance under the current framework. The August 1998 costing analysis showed roughly equal costs in the aggregate under the Initiative for multilaterals and bilaterals, although different country-specific debt distributions could affect this ratio under alternative scenarios.

The database covers debt stocks, not flows, and thus the impact on debt-service payments of various options has not been calculated. The debt-service impact would depend on how creditors choose to deliver debt relief.

4. Several aspects of the attached tables deserve attention. First, while the estimates of cost levels are subject to substantial margins of uncertainty as noted above, somewhat more confidence is attached to the relative costs of the various options and in particular the direction of change in moving from one option to another. Second, the HIPC Initiative is designed to provide debt relief for those countries with strong reform programs which have unsustainable debt situations after full use of traditional debt relief-Naples terms from Paris Club bilateral creditors and at least comparable relief from non-Paris Club bilateral and commercial creditors. The cost estimates presented in the tables thus relate only to costs under the HIPC Initiative, and exclude the substantial amounts of debt relief already provided-or assumed to be provided-by Paris Club and other bilateral creditors and institutions. Third, the columns showing the cost impact of shorter track records assume early adoption and sustained implementation of Bank- and Fund-supported reform programs. Finally, the costs are presented in net present value (NPV) terms, with costs at the completion point expressed in 1998 US dollars using a 6 percent discount rate. As a rough rule of thumb, the amount of nominal debt-service relief, or the nominal debt reduction, delivered under the Initiative is twice the NPV reduction, although this ratio depends on the specific profile of assistance chosen by creditors. As at end-1998, based on the 1998 costing database, the total NPV of debt of all 41 HIPCs after assumed full use of traditional (Naples-terms) debt relief is estimated at approximately US$100 billion.

5. In considering proposals, it is important to keep in mind that financing for the current HIPC Initiative (even assuming the exclusion of Liberia, Somalia, and Sudan) has yet to be fully secured, despite the exceptional measures taken by creditors. Both the IMF and World Bank remain committed to funding their full costs under the HIPC Initiative.⁶ The World Bank expects to make continuing transfers as necessary to its HIPC Trust Fund from net income to finance its costs. For the IMF, a consensus appears to be forming in support of steps that would enable the Fund substantially to cover its expected costs under the present structure of the HIPC Initiative and for the continuing ESAF facility. There is a shortfall in the funding of the contribution of some multilateral creditors, including the African Development Bank, despite substantial bilateral contributions on their behalf through the World Bank's HIPC Trust Fund.

6. Questions on this information note may be addressed to Ms. Gita Bhatt (202-623-7968, gbhatt@imf.org) or Mr. Anthony Gaeta (202-473-1798, agaeta@worldbank.org).

¹ General information regarding the HIPC Initiative can be found on the Fund and Bank web sites.
² See the letters from Finance Minister Lafontaine to Messrs. Camdessus and Wolfensohn dated January 21, 1999.
³ See the IMF non-fuel commodity price index; and World Bank, Global Commodity Markets, January 1999.
⁴ A sensitivity analysis in the August 1998 costing exercise indicated that aggregate costs (excluding Liberia, Somalia, and Sudan) would increase by about US$1 billion in 1996 dollar terms (about 12 percent) if export growth were 2 percentage points lower in every year prior to the completion point.
⁵ Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Dem. Rep. of, Congo, Rep. of, Côte d'Ivoire, Equatorial Guinea, Ethiopia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao P.D.R., Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, Republic of Zambia.
⁶ See the discussion of financing contained in the "HIPC Initiative--Review and Outlook," September 22, 1998, and "HIPC Initiative--A Progress Report," September 25, 1998.

Tables also available in pdf format.

Table 1. Tentative Costings of Illustrative Changes in HIPC Initiative Framework
All 41 Countries 1/

								Shorter Track Record Total Costs (1998 U.S. dollar billions) 3/
	NPV Debt-to- Export Target Percent)	Fiscal Window Thresholds 2/ (Percent)	NPV Debt-to Revenue Targets (Percent)	Costs 3/ (1998 U.S. $ billions)	Number of countries receiving assistance	Of which: under fiscal criterion	Additional Costs of Retroactivity 4/ (1998 U.S. $ billions)	Eliminate First Stage 5/	Eliminate Second Stage 6/	Shorten Second Stage by One Year 7/
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)

1. Current framework	200	40/20	280	16	23	3	--	19	24	17
2. Lower NPV debt /export target	150	40/20	280	22	30	3	2	25	31	24
3. Lower NPV debt/revenue target With lower thresholds
(a)	200	30/15	250	17	25	5	1	20	25	18
(b)	200	30/15	200	18	26	7	2	22	27	19
With no thresholds
(c)	200	- / -	250	19	29	17	1	23	30	21
4. Lower NPV debt export and NPV debt-revenue targets
(a)	150	- / -	200	25	36	20	5	29	36	28
(b)	100	- / -	150	34	38	15	8	38	45	36

Source: HIPC Initiative-Review and Outlook; and, staff estimates based on information collected for that paper. Costs expressed in 1998 U.S. dollars using a 6 percent discount rate.

1/ The countries are: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Dem. Rep. of, Congo, Rep. of, Cote d'Ivoire, Equatorial Guinea, Ethiopia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao P.D.R., Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanamar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, , Togo, Uganda, Vietnam, Yemen, and Republic of Zambia.
2/ First number refers to the minimum ratio of exports/GDP (percent) and second threshold refers to minimum ratio of fiscal revenue/GDP (percent needed to qualify for NPV debt-to-revenue target. - / - means no minimum thresholds applied.
3/ Applying alternative targets/thresholds only to countries that have not reached decision or completion points.
4/ Applying alternative targets/thresholds to countries that have reached completion point (Bolivia and Uganda) and decision point (Benin, Burkina Faso, Côte d'Ivoire, Guyana, Mali, Mozambique, and Senegal).
5/ Implying an overall track record of three years with countries reaching decision points as soon as possible followed by a three-year second stage; assumes no delays in implementation.
6/ Implying an overall track record of three years with countries reaching decision and completion points simultaneously and no second stage; assumes no delays in implementation.
7/ Implying an overall track record of five years, with a three-year first stage to the decision point and a two-year second stage to the completion point; assumes no delays in implementation.

Table 2. Tentative Costings of Illustrative Changes in HIPC Initiative Framework
41 Countries excluding Liberia, Somalia, and Sudan

						Shorter Track Record Total Costs (1998 U.S. dollar billions) 2/
	NPV Debt-to-Export Target(Percent)	Fiscal Window Thresholds 1/ (Percent)	NPV Debt-to Revenue Targets (Percent)	Costs 2/ (1998 U.S. $ billions)	Additional Costs of Retroactivity 3/ (1998 U.S. $ billions)	Eliminate First Stage 4/	Eliminate Second Stage 5/	Shorten Second Stage by One Year 6/
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)

1. Current framework	200	40/20	280	10	--	11	16	11
2. Lower NPV debt/export target	150	40/20	280	15	2	17	22	17
3. Lower NPV debt/ revenue target With lower thresholds
(a)	200	30/15	250	10	1	12	17	11
(b)	200	30/15	200	12	2	14	18	13
With no thresholds
(c)	200	- / -	250	12	1	14	21	14
4. Lower NPV debt export and NPV debt-revenue targets
(a)	150	- / -	200	18	5	20	27	20
(b)	100	- / -	150	26	8	29	36	28

Source: HIPC Initiative-Review and Outlook; and, staff estimates based on information collected for that paper. Costs expressed in 1998 U.S. dollars using a 6 percent discount rate.

1/ First number refers to the minimum ratio of exports/GDP (percent) and second threshold refers to minimum ratio of fiscal revenue/GDP (percent) needed to qualify for NPV debt-to-revenue target. -/- means no minimum thresholds applied.
2/ Applying alternative targets/thresholds only to countries that have not reached decision or completion points.
3/ Applying alternative targets/thresholds to countries that have reached completion point (Bolivia and Uganda) and decision point (Benin, Burkina Faso, Côte d'Ivoire, Guyana, Mali, Mozambique, and Senegal).
4/ Implying an overall track record of three years with countries reaching decision points as soon as possible followed by a three-year second stage; assumes no delays in implementation.
5/ Implying an overall track record of three years with countries reaching decision and completion points simultaneously and no second stage; assumes no delays in implementation.