Public Information Notice No. 06/41

Public Information Notice: IMF Executive Board Discusses the List of Ring-Fenced Countries That Meet the End-2004 Income and Indebtedness Criteria under the Enhanced HIPC Initiative and the Review of Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries

April 18, 2006

On April 5, 2006, the Executive Board of the International Monetary Fund (IMF) considered a set of papers related to the Fund's debt relief and concessional assistance to its low-income members: the Heavily Indebted Poor Countries Initiative-List of Ring-Fenced Countries That Meet the Income and Indebtedness Criteria at End-2004, prepared jointly by staffs of the IMF and the World Bank, and the Review of Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries. Two additional papers present background information on the implementation of the HIPC Initiative and of the Multilateral Debt Relief Initiative (MDRI)¹.

Background

The IMF provides concessional financing to its low-income members through subsidized lending under the Poverty Reduction and Growth Facility (PRGF), the newly-established Exogenous Shocks Facility (ESF), Emergency Post-Conflict Assistance (EPCA), and Emergency Natural Disaster Assistance (ENDA). The IMF also extends debt relief to these countries under the HIPC Initiative, and, more recently, the MDRI. The resources for financing the IMF's concessional assistance and debt relief come from bilateral contributions and the IMF itself and are channeled through trusts and administered accounts, which the IMF administers on behalf of contributors.

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. In September 2004, the Executive Boards of the International Development Association (IDA) and the IMF decided to "ring-fence" its application to only those countries satisfying the Initiative's income and indebtedness criteria using end-2004 data. A preliminary list of 13 countries satisfying these criteria was presented to the two Boards in September 2005 (See PIN No. 05/129).

Based on updated data and information, 11 countries have been assessed to meet the end-2004 income and indebtedness criteria and might wish to be considered for HIPC Initiative debt relief. Three other countries have been identified as meeting also these criteria but have indicated that they do not wish to avail themselves of the Initiative. To become eligible for debt relief under the HIPC Initiative, countries that wish to participate in the Initiative must have begun a reform program supported by the IMF and IDA between October 1, 1996 and December 31, 2006, the date of the HIPC Initiative sunset clause. To qualify for debt relief, eligible countries need to demonstrate the capacity to use the expected assistance prudently by establishing a satisfactory track record under IMF- and IDA-supported programs and by having put in place a poverty reduction strategy.

The cost of HIPC Initiative debt relief for the 11 countries that meet the income and indebtedness criteria and might wish to be considered for debt relief is estimated at US$21.0 billion in 2004 NPV terms, about half of the cost of the Initiative for the 29 HIPCs that have already reached their decision points. The three countries in protracted arrears to the IMF (Liberia, Somalia, and Sudan) account for about 73 percent of that cost.

In June 2005, the Group of 8 (G-8) proposed that the IMF, the International Development Association, and the African Development Fund cancel 100 percent of their claims on countries having reached, or upon reaching, the completion point under the enhanced HIPC Initiative. In response, the IMF Executive Board adopted the MDRI framework in December 2005. It became effective on January 5, 2006. MDRI debt relief is intended to complement the HIPC Initiative by providing additional resources to help a group of low-income countries reach the Millennium Development Goals, while ensuring that the financing capacity of the IMF is preserved. The IMF's MDRI relief covers the full stock of debt owed to the IMF at end-2004 that remains outstanding at the time of the provision of debt relief. Immediately after the MDRI became effective, the IMF delivered debt relief totaling SDR 2.3 billion (or US$3.4 billion) to 19 qualifying countries on January 6, 2006.

Executive Board Assessment

Executive Directors welcomed the opportunity to consider the list of ring-fenced IDA-only/PRGF-eligible countries that have been assessed to have met the end-2004 indebtedness criterion in relation to HIPC eligibility, and to review issues related to the financing of the Fund's assistance and debt relief to low-income member countries. They welcomed the progress made by many countries toward establishing the policy performance track record before the current sunset clause expires at end-2006.

Directors agreed to close the list of countries that at this time have been assessed to have met the end-2004 indebtedness criterion. They supported the methodological approach taken by staff in reviewing the available data to conduct this assessment, and endorsed the list of countries identified in the process. Directors broadly recognized that the list could be amended to include countries whose data are verified to have met the indebtedness criterion at end-2004. Many Directors suggested that countries that are likely to have met the end-2004 indebtedness criterion once their debt data are verified, such as Afghanistan, should be added to the list.

Many Directors considered that, in keeping with the principle of country ownership, countries that have indicated formally that they do not wish to avail themselves of the HIPC Initiative should not be included explicitly in the list. Directors also considered that countries' intentions should be conveyed to the Board and reflected in future documents on the HIPC Initiative.

Directors recognized that bringing to the HIPC decision point countries that may intend to progress toward this goal (Central African Republic, Comoros, Côte d'Ivoire, Eritrea, Haiti, the Kyrgyz Republic, Liberia, Nepal, Somalia, Sudan, and Togo) would be challenging, as several of them are affected by conflict, 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 and implement reform strategies and to assist them through the HIPC Initiative process if they request so. Directors encouraged the countries that meet all eligibility criteria and desire to participate in the HIPC Initiative to establish a track record of policy performance and implement satisfactorily their poverty reduction strategies so that they can qualify for, and begin receiving, debt relief under the enhanced HIPC Initiative and eventually under the MDRI.

Directors noted that a number of potentially eligible countries have not had an IMF- and IDA-supported program in place since the beginning of the Initiative. They urged these countries to make every effort to start a program before the expiry of the sunset clause. Directors recognized that more time and flexibility may be needed for some of these countries to start to establish a track record of policy performance, while also stressing the need to ensure evenhandedness across low-income member countries. In this context, they asked the staff to return to the Board in the coming months with possible options related to the expiration of the sunset clause, and to explore options for arrears clearance for the three protracted arrears cases.

Directors welcomed the delivery of MDRI debt relief to 19 qualifying members on January 6, 2006, which is expected to have a substantial impact on these countries' external debt service payments. They stressed the importance of preserving the Fund's financial capacity to low-income members following the MDRI, and called on the staff to continue to monitor the financing situation closely. At the same time, to avoid a new build-up of unsustainable debt, the use of resources made available through MDRI debt relief in member countries will need to be monitored closely. In this regard, Directors supported the joint efforts by the staffs of the Fund and the World Bank to monitor increases in poverty-reducing expenditures and changes in expenditure composition following the provision of MDRI relief, as well as the member's progress toward achieving the MDGs.

Directors noted that the potential costs to the Fund of delivering HIPC and MDRI debt relief to the three protracted arrears cases (Liberia, Somalia, and Sudan) and newly identified potentially HIPC eligible cases could amount to SDR 1.9 billion in end-2005 NPV terms. Directors emphasized that financial resources needed to meet these costs will need to be mobilized to help these countries benefit from the Fund's debt relief in a timely manner. In this context, Directors noted the commitment made earlier by the G-8 to cover, on a fair burden-sharing basis, the cost of debt relief for countries that may become eligible for the HIPC Initiative under the extended sunset clause. Directors also noted the G-8 commitment that donors would provide the extra resources necessary for full debt relief at completion point for the three protracted arrears cases.

Directors noted that, while resources in the Loan Account of the PRGF-ESF Trust are expected to be sufficient to finance new PRGF commitments for the next three years, these resources could be exhausted more rapidly than projected, particularly if countries that are currently in arrears to the Fund are in a position to enter into PRGF arrangements. Directors welcomed the firm pledges of ESF subsidy contributions amounting to SDR 0.2 billion, but noted that this is still short of the target of SDR 0.5 billion in end-2005 NPV terms, which is needed to cover the projected demand for financing under the ESF for a five-year period. Directors stressed the importance of further contributions to enable the Fund to provide timely concessional shock financing.

Directors agreed that, to allow the Fund to access additional resources committed for the ESF, the borrowing limit under the PRGF-ESF Trust Loan Account should be raised to SDR 20 billion, and that the loan commitment and drawdown periods should be extended by five years to end-2011 and end-2014, respectively. Directors urged the current Trust lenders to consent to the proposed changes after receiving the formal request from the Fund.

Directors reaffirmed that, as agreed at the time of the MDRI and ESF decisions, topping-up assistance for eligible HIPCs will be calculated on the basis of the debt stock prior to the delivery of MDRI relief from the Fund. This approach will ensure that the Fund's MDRI debt relief is additional to its assistance under the HIPC Initiative. Moreover, in line with existing policies, Directors agreed that the Fund will only deliver topping-up assistance once satisfactory financing assurances have been received from other creditors under the HIPC Initiative. Directors saw scope for increased efforts by the Fund to encourage non-Paris Club creditors to participate in the HIPC Initiative, and to impress on donor countries the importance of not reducing aid after the implementation of the MDRI.

Directors noted that resources available for the subsidization of emergency assistance are estimated to be sufficient to cover the needs for existing cases, but that new subsidy contributions would be needed in the event of new large requests for emergency assistance. Directors underscored the importance of securing further contributions to ensure that the Fund is able to continue providing such assistance on concessional terms in a timely manner.

¹ Heavily Indebted Poor Countries Initiative-Statistical Update and The Multilateral Debt Relief Initiative-Progress Report on Implementation.