Public Information Notice No. 08/03

Public Information Notice: IMF Executive Board Modifies HIPC Initiative

January 17, 2008

On January 14, 2008, the Executive Board of the International Monetary Fund (IMF) amended the PRGF-HIPC Trust Instrument (Poverty Reduction and Growth Facility-Heavily Indebted Poor Countries) to add Staff-Monitored Programs (SMPs) that meet certain standards among the instruments that HIPCs may use to build a track record to reach the decision point under the HIPC Initiative. This amendment will facilitate debt relief to Liberia and other HIPCs with strong performance under SMPs that meet these standards, by allowing them to reach the HIPC Initiative decision point on the basis of this performance.

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 1999 to provide for faster, deeper, and broader debt relief. To qualify for debt relief under the Initiative, eligible countries need to demonstrate the capacity to use the expected assistance prudently by establishing a satisfactory track-record under programs supported by the IMF and the World Bank's International Development Association (IDA) and by having put in place a poverty reduction strategy. In total, 41 countries are eligible or potentially eligible to receive debt relief under the HIPC Initiative. Of these, 23 have completed the HIPC Initiative process. When those countries reached the completion point, the IMF and the World Bank determined that the conditions had been met to deliver full and irrevocable debt relief. Other creditors are expected to follow and provide comparable relief. Of the other 18 eligible countries, 9 countries have reached the decision point, at which time the IMF and other creditors decide on a country's qualification for assistance and commit to providing debt relief once certain conditions are met. Nine countries have yet to reach the decision point.

The Fund's provision of debt relief under the HIPC Initiative relies on a set of comprehensive modalities that apply uniformly across all HIPCs. In particular, to reach the decision point, a country must, among other requirements, have established a track-record of strong policy performance under a qualifying Fund-supported program. Approval of a Fund-supported program requires that resources from donors be available for the planned provision of debt relief as well as for arrears clearance, where applicable. Thus, delays in mobilizing these resources from donors could prevent a HIPC with large arrears to the Fund or other multilateral creditors from building a track-record toward the decision point even if its policies would be sufficient to warrant Fund support, were donor financing available. This in turn implies that the country is delayed in reaching the decision point because of circumstances that are largely beyond its control. This issue has recently arisen in the context of Liberia, but could also apply to a number of other HIPCs. The amendment adopted by the Board today would avoid this situation by enabling countries to build a decision point track-record on the basis of an SMP that meets the standards specified in the amendment, even while financing is being mobilized from donors. In February 2007, and again in July 2007, the Board determined that the policies implemented by Liberia under its SMP would warrant the Fund's financial support, if not for the lack of financing assurances. On November 12, 2007, IMF Managing Director Dominique Strauss-Kahn announced that the IMF had secured sufficient financing pledges—totaling SDR 530 million (US$842 million) from member countries to allow the Fund to provide debt relief to Liberia.

Executive Board Assessment

Executive Directors welcomed the staff's proposal to modify the PRGF-HIPC Trust Instrument to take into account the specific circumstances of a number of Heavily Indebted Poor Countries (HIPCs), including Liberia. In adopting the proposed decision, they considered that modification of the Fund's existing rules and policies would avert delays in the delivery of debt relief to Liberia, as well as similarly situated members, for whom, due to factors beyond their control, adequate financing assurances may not be in place to qualify for other instruments that may be used to build a track record toward the HIPC decision point. The amendment is aimed at giving these countries credit, in appropriate circumstances, for their record in implementing strong programs of macroeconomic stabilization and structural reform during the time when the Fund and/or other international institutions are securing the necessary financing assurances to enable arrears clearance and debt relief.

Directors considered that the amendment represents a reasonable balance between facilitating delivery of debt relief to strong performing countries, while at the same time minimizing changes to the internationally-agreed HIPC Initiative framework, avoiding unwanted spillover to other Fund policies, and ensuring that any modification to existing rules and policies would apply uniformly to all similarly-situated HIPCs.

As a result of the amendment of the PRGF-HIPC Trust Instrument, performance under Staff- Monitored Programs (SMPs) could henceforth be counted as a track record toward reaching the HIPC Initiative decision point in cases where the Board agrees with staff's assessment that macroeconomic and structural reform policies under the SMP meet the policy standards associated with programs supported by arrangements in the upper credit tranches (UCT) or under the PRGF. The amendment also includes such SMPs among the programs that members may use to establish eligibility for debt relief under the PRGF-HIPC Trust Instrument. Consequently, a member that is eligible or potentially eligible for HIPC Initiative debt relief and has not yet reached the decision point will now be able to have its strong policy performance under a qualifying SMP count toward the decision point track record, even if financing assurances are lacking to allow access to other qualifying instruments identified in the PRGF-HIPC Trust Instrument.

Directors emphasized that the amendment does not change the status of SMPs in the Fund's toolkit. In particular, SMPs will continue to be approved by management, and not by the Board; and the Board's agreement with staff's assessment that a given SMP has policies of UCT quality will be used only to facilitate a member's eligibility and/or qualification for HIPC Initiative debt relief. Directors noted that in several recent Board discussions, the Board's UCT quality determinations had been recorded in the Chairman's Closing Remarks or in the Chairman's Summing Up. Going forward, they noted the importance of maintaining a process that clearly reflects the key role of the Executive Board in reaching agreement with the staff assessment on the UCT quality of SMPs. In this context, the Executive Board agreed that such Board determinations will henceforth be recorded in the Chairman's Summing Up related to the Board discussion.

Directors agreed that, in order to preserve payment discipline, the SMPs of members not eligible for a Rights Accumulation Program (RAP) would qualify only if they have no arrears to the Fund, and, in cases where they have arrears to the World Bank, an agreed financing plan and a timetable for normalizing financial relations with the Bank are in place. RAP-eligible members—consistent with their treatment under the RAP policy—would not be required to clear existing arrears to the Fund either prior to or during a qualifying SMP, but would be expected to remain current on new obligations to the Fund; they would also need to have in place an agreed financing plan and a timetable for normalizing financial relations with the World Bank in case of arrears to them. Directors acknowledged, however, that some RAP-eligible members that have emerged from conflict with severely limited payment capacity may face difficulties in remaining current even on their new obligations to the Fund. Considering the special situation of these members, the decision allows some limited flexibility for them to accumulate new arrears to the Fund during the period of a qualifying SMP in the circumstances specified in the amendment. A number of Directors, however, would have preferred to avoid having such flexibility in the amendment, which could be perceived as giving rise to moral hazard problems with regard to payments to the Fund.