Public Information Notice No. 05/129

Public Information Notice: IMF Executive Board Discusses the Status of Implementation of the Enhanced HIPC Initiative

September 21, 2005

On September 9, 2005, the Executive Board of the International Monetary Fund (IMF) discussed a report on the status of implementation of the Heavily Indebted Poor Countries (HIPC) Initiative, prepared jointly by staffs of the IMF and the World Bank.

Background

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as a comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily-indebted countries. It was enhanced in the fall of 1999 to provide for faster, deeper, and broader debt relief, aiming at reducing the net present value (NPV) of HIPCs' external public debt to a maximum of 150 percent of exports, or for small open economies, 250 percent of government revenue.

Eligible countries need to demonstrate the capacity to use the assistance granted prudently by establishing a satisfactory track record under IMF- and International Development Association (IDA)-supported programs. A key input in this process is the poverty reduction strategy paper (PRSP), prepared with broad participation of civil society, and intended to serve as the basis for implementing the country's poverty reduction strategy.

Once a decision is made to grant HIPC Initiative relief, and provided that the country stays on track with its IMF-and IDA-supported program, the IMF, IDA, Paris Club, and some other creditors grant relief on current maturities. When specific measures needed to strengthen poverty reduction efforts and macroeconomic management have been implemented, the IMF and IDA provide the remainder of the committed debt relief, and Paris Club creditors reduce the stock of debt as agreed; other multilateral, bilateral, and commercial creditors also contribute to the debt relief on comparable terms.

This report reviews progress in the implementation of the enhanced HIPC Initiative since September 2004.¹ It includes updates on the status of implementation in countries during their interim period, the status of creditor participation under the Initiative, and the preliminary list of countries that satisfy the indebtedness criterion for eligibility under the extended "sunset clause" of the HIPC Initiative.

Debt relief packages are now in place for 28 HIPCs; the great majority of these are sub-Saharan African countries. Total committed assistance to these countries is estimated at about US$38.2 billion in NPV terms, or about US$56.4 billion in nominal terms. This, together with additional bilateral debt forgiveness beyond the HIPC Initiative, is expected to reduce the overall debt stock of these countries by two-thirds and to lower their debt service payments to less than 10 percent of exports of goods and services. Eighteen of the HIPCs that have reached the decision point have also reached their completion points under the Initiative, at which time debt relief was delivered irrevocably. Ten HIPCs have not yet reached the decision point due to difficulties in establishing a policy track record of performance, as most of them have been affected by conflict and several have large arrears to various creditors.

The report indicates that most multilateral creditors and all Paris Club bilateral creditors continue to provide their share of debt relief committed under HIPC Initiative. Many Paris Club bilateral creditors have also continued to grant, on a bilateral basis, additional debt relief beyond that committed under the HIPC Initiative. In contrast, the share of debt relief granted by other creditors has declined, as a number of non-Paris Club creditors have withdrawn their participation from the Initiative and the number of lawsuits filed by commercial creditors against HIPCs has increased. Finally, the report provides a preliminary list that identifies 13 countries that could potentially be eligible for debt relief under the HIPC Initiative. These include nine countries already identified as potential HIPCs (Central African Republic, Comoros, the Republic of Congo, Côte d'Ivoire, Lao PDR, Liberia, Somalia, Sudan, and Togo) plus Eritrea, Haiti, Kyrgyz Republic, and Nepal. Data deficiencies preclude reaching firm conclusions on the eligibility of a number of other countries. Work will continue to clarify data issues, and a final list of countries satisfying the indebtedness criterion for eligibility will be provided to the Executive Board in 2006.

Executive Board Assessment

Executive Directors reiterated their strong support for the Enhanced HIPC Initiative, and welcomed the continued progress being made under this Initiative in providing debt relief to the world's poorest countries. They noted that twenty-eight countries have reached their decision points and that eighteen of them have now reached the completion point. HIPC Initiative debt relief committed to the countries that have reached the decision point, together with additional debt forgiveness, represents a two-thirds reduction of their overall debt stock. As a result, debt-service payments for most HIPCs are expected to decline to less than 10 percent of exports—below the debt service ratio for non-HIPC low-income countries—and thus to help HIPCs to increase their poverty-reducing expenditures substantially. In the twenty-eight countries that have reached the decision point, such expenditures were almost four times as great as debt-service payments in 2004. Directors underscored that continued adherence to a strong policy framework and appropriate debt management remain essential after the completion point, for ensuring a lasting exit from unsustainable debt and maximizing the benefits for poverty reduction and attainment of the Millennium Development Goals.

Notwithstanding these achievements, Directors recognized that many countries have yet to progress to the completion point. They noted that, for these countries in the interim period between the decision and completion points, progress toward reaching the completion point will depend on satisfactory performance under their PRGF arrangements and on the development and implementation of their poverty reduction strategies. Directors welcomed the new PRGF arrangements approved in recent months for a number of countries, and encouraged them to stay on track with their economic, social, and structural reform programs in order to reach their completion points without delay. Directors urged staff to continue to work with the authorities of the other HIPCs in the interim period to help them, where possible, build a satisfactory record of performance towards their completion points. In this regard, Directors attached high priority to assisting countries in improving their institutional capacity and policy processes. In particular, the importance of improved public expenditure management and adequate tracking of poverty outlays was emphasized.

Directors acknowledged that the majority of HIPCs' bilateral creditors have agreed to provide debt relief, but stressed that ensuring the full participation of non-Paris Club and commercial creditors remains an important challenge. They reiterated their call to creditors that have not yet joined the international community to do so, and to contribute their share toward reducing HIPCs' debt to sustainable levels. Directors regretted that a number of non-Paris Club creditors have withdrawn participation from the Initiative. While welcoming the contribution of IDA's Debt Reduction Facility to reduce commercial debt, Directors expressed concern over the increase in lawsuits initiated by private creditors against HIPCs. Underscoring the crucial importance of equitable participation and burden sharing in the HIPC Initiative, they strongly urged staff to take all possible measures, within the existing institutional constraints, to help increase creditor participation in the Initiative and facilitate cooperation between creditors and HIPCs. Directors' recommendations included actions to enhance the transparency of creditor participation, more explicit attention to these issues in Article IV consultations, targeted technical assistance to improve debt management systems, intensified moral suasion, and creditor education of the HIPC methodology. Some Directors also suggested that the staff explore further the legal possibilities of reducing litigation at an international level. Several Directors observed that some of the HIPCs themselves could do more to promote contacts with non-Paris Club creditors.

Directors welcomed the preliminary list provided by staff to identify countries that could be eligible for HIPC assistance under the extended sunset clause. They supported the methodological approach taken by staff in carefully reviewing available data before reaching firm conclusions on HIPC eligibility. Directors encouraged staff to advance this work promptly and looked forward to receiving the final list of potentially eligible countries early in 2006. A robust and reliable list was seen as particularly important, given the eligibility of new HIPC entrants for one hundred percent debt relief from the IMF, IDA, and AfDF under the G-8 debt cancellation proposal. Some Directors called for caution in publishing the list of eligible countries, given the implications for credit flows to these countries and the still preliminary nature of eligibility assessments. At the same time, financing these additional HIPC cases will also be critical.

Bringing eligible, or potentially eligible, HIPCs to the decision point will be a challenging goal, as these countries are mostly conflict-affected, and a number of them have substantial arrears to official creditors. Directors urged the staff to continue to work with the authorities in these countries, wherever possible, to develop strategies to move ahead. They encouraged eligible countries to establish a track record of policy performance and a satisfactory poverty reduction strategy so that they could qualify and begin receiving debt relief under the enhanced HIPC Initiative. Potentially eligible countries that have not had an IMF- or IDA- supported program in place since the beginning of the Initiative should make every effort to start one before the expiry of the sunset clause at end-2006 so as to become eligible for debt relief under the enhanced HIPC Initiative. At the same time, Directors reiterated the importance of ensuring the high quality of these programs and of preserving the key principles of the HIPC Initiative.