Update on the Financing of PRGF and HIPC Operations and the Subsidization of Post-Conflict Emergency Assistance,
August 18, 2003
Update on the Financing of PRGF and HIPC Operations and the Subsidization of Post-Conflict Emergency Assistance,
March 20, 2003
Debt Initiative for the Heavily Indebted Poor Countries (HIPCs) A Factsheet
Debt Relief for Low-Income Countries The Enhanced HIPC Initiative
Overview: Transforming the Enhanced Structural Adjustment Facility (ESAF) and the Debt Initiative for the Heavily Indebted Poor Countries (HIPCs)
The Poverty Reduction and Growth Facility (PRGF) Operational Issues
Poverty Reduction Strategy Papers Operational Issues
Financial Organization and Operations of the IMF
Gold in the IMF
Financial Assistance for the IMF's Poorest Members—An Update
May 2, 2001
1. The IMF provides financial assistance to low-income members in two ways: through concessional lending under the Poverty Reduction and Growth Facility (PRGF) and through debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. During the past year, significant progress was made to provide deeper, broader, and faster debt relief and to support poverty reduction and lasting economic growth by the IMF's poorest members. In addition, as the existing loan resources under the PRGF are expected to become fully committed soon, new loan resources are being sought from bilateral lenders for a continuation of PRGF lending during 2002-05, the so-called interim PRGF.
2. The HIPC Initiative is designed to reduce the external debt burden of eligible countries to sustainable levels,1 enabling them to service their external debts without the need for further debt relief and without compromising growth. Launched in 1996, the Initiative marked the first time that multilateral, Paris Club, and other official and bilateral creditors united to take this kind of comprehensive approach to debt relief. Assistance under the HIPC Initiative is limited to countries that are eligible for PRGF and International Development Association (IDA) loans and that:
4. The IMF supports the economic adjustment and reform efforts of its
low-income members through the PRGF, which provides loans at an annual
interest rate of ½ of 1 percent with repayment over 5 ½ -
10 years. The PRGF is designed to make poverty reduction programs a
key element of a growth-oriented strategy.2
Programs supported by the PRGF are framed around a comprehensive, nationally-owned
poverty reduction strategy, the costs of which are fully incorporated
into the macroeconomic framework. For countries that receive HIPC Initiative
assistance, this strengthens the link between debt relief and poverty
4. The IMF supports the economic adjustment and reform efforts of its low-income members through the PRGF, which provides loans at an annual interest rate of ½ of 1 percent with repayment over 5 ½ - 10 years. The PRGF is designed to make poverty reduction programs a key element of a growth-oriented strategy.2 Programs supported by the PRGF are framed around a comprehensive, nationally-owned poverty reduction strategy, the costs of which are fully incorporated into the macroeconomic framework. For countries that receive HIPC Initiative assistance, this strengthens the link between debt relief and poverty reduction.
5. Concessional lending under the current PRGF is provided by the PRGF Trust, established in December 1987, which
The HIPC Initiative
8. Enhancements to the HIPC Initiative to provide deeper, broader, and faster debt relief increased substantially the costs of the Initiative. The total cost of the enhanced HIPC framework is estimated at US$31.1 billion in end-2000 net present value (NPV) terms,4 the IMF's share of these costs is estimated at US$2.4 billion in NPV terms.5
9. Under the enhanced HIPC Initiative framework, the IMF and the World Bank determine the qualification of a member and the amount of assistance to be provided at the decision point—the point when the member completes its first (typically three-year) record of good policy performance under programs supported by the IMF and the World Bank. The decision point also marks the point at which the IMF commits the amount of HIPC assistance. A qualified member may receive interim assistance of up to 60 percent (75 percent in exceptional circumstances) of the determined amount of HIPC assistance between the decision point and the completion point—the point when the member has fulfilled all policy-related conditions for HIPC assistance. Remaining undisbursed HIPC Initiative assistance is delivered at the completion point.
10. The IMF, as Trustee of the PRGF-HIPC Trust, can provide its share of assistance under the HIPC Initiative to qualified members in the form of grants and/or loans, which are used to help meet debt service payments to the IMF. So far, only grants have been provided. Between the decision point and the completion point, interim assistance may be provided in annual installments in the form of grants deposited to an account of the member administered by the IMF, as Trustee of the PRGF-HIPC Trust. These resources are used to help meet debt service payments to the IMF as they fall due. The member's account earns interest on any balance during the interim period. At the completion point, the IMF deposits the remaining amount of undisbursed committed assistance to the member's account. After the completion point is reached, the member will continue to draw on the resources of its account to help meet debt service payments to the IMF according to a schedule agreed between the IMF and the member.
Continuation of PRGF lending
11. The framework for the PRGF envisages continued commitments to borrowers under the current PRGF Trust through late 2001 or early 2002, to be followed by a four-year interim PRGF with a commitment capacity of about SDR 1 billion (US$ 1.3 billion) per year. The objective of the interim PRGF will be the same as that of the current PRGF, i.e., to promote sustainable economic growth and achieve durable poverty reduction. The continuation of concessional lending for the period after 2005 would need to be re-assessed closer to the time, but a substantial proportion of such lending is expected to be provided by the IMF's own resources accumulating in the PRGF Trust Reserve Account. These resources will become available as PRGF lenders are repaid and the security provided by the Reserve Account is no longer needed.
12. The subsidy needs of the interim PRGF, estimated at US$1.3 billion in NPV terms, are included in the financing arrangements for the PRGF-HIPC Trust.6 (See Operational features of the PRGF-HIPC Trust). The loan resources of SDR 4-4.5 billion (US$5-6 billion) for the interim PRGF are being sought from bilateral lenders, including current loan providers to the Loan Account of the PRGF Trust.
Member Country Contributions14. Bilateral pledges from member countries amount to about US$1.5 billion in NPV terms and come from a wide cross-section of the IMF's membership, demonstrating the broad support for the HIPC and PRGF initiatives. Altogether, 94 member countries have pledged their support: 27 industrial countries; 58 developing countries; and 9 countries in transition. As of end-March 2001, effective bilateral contributions amounted to US$1.4 billion in NPV terms, or 92 percent of total pledged contributions.
15. The IMF's own contributions amount to US$2.3 billion in NPV terms. The bulk of this, US$1.7 billion in NPV terms, comes from the investment income on the net proceeds generated from off-market transactions in gold of 12.9 million troy ounces. The off-market gold transactions were completed in April 2000, generating net proceeds of SDR 2.226 billion. These resources have been placed in the Special Disbursement Account (SDA) and invested for the benefit of the HIPC Initiative. Immediately after the off-market transactions in gold, the IMF's Executive Board authorized the transfer of nine-fourteenths of the investment income from net gold proceeds to be used for this purpose. Subsequently, on November 30, 2000, the IMF's Executive Board took a decision to authorize the transfer of the remaining five-fourteenths of the investment income.
16. The IMF also contributes about US$0.6 billion in NPV terms by foregoing compensation for the cost of administering PRGF operations for the financial years 1998 through 2004 and transferring the equivalent amount from the PRGF Reserve Account to the PRGF-HIPC Trust, and by transferring to the PRGF-HIPC Trust part of the interest surcharge on certain outstanding purchases under the Supplemental Reserve Facility. 7
Delivery of HIPC Assistance
17. Financing provided by IMF member countries and by the IMF itself has permitted the IMF to move ahead with early cases under the enhanced HIPC Initiative. Thus far, the IMF has already committed enhanced HIPC Initiative assistance of US$1.7 billion to 22 member countries (Table 3). The total assistance from all creditors to these countries will reduce their external debt stock by US$20 billion in NPV terms, or by nearly one-half. In combination with traditional debt relief and pledges of additional bilateral forgiveness, the external indebtedness of these 22 countries will be reduced by about two-thirds, or from US$53 billion to US$20 billion in NPV terms.
Loan Resources for the Interim PRGF18. To ensure the continuity of PRGF operations through the interim period 2002-2005, additional loan resources of US$5-6 billion need to be mobilized. A number of member countries have already indicated their readiness to provide new loan resources for this purpose. The IMF will continue to work with potential lenders to secure additional commitments to ensure full financing of the principal of the interim PRGF.
19. When the PRGF-HIPC Trust was established in 1997, attention was focused on the provision of HIPC Initiative assistance and the subsidization of the interest on interim PRGF lending. No legal framework was established for channeling loan resources under the interim PRGF, in part because it was not clear how the principal would be financed. During the discussion of PRGF-HIPC financing on March 28, 2001, IMF Executive Directors reviewed a staff proposal that interim PRGF loans be provided through the existing Loan Account of the PRGF Trust and be subsidized by resources in the PRGF-HIPC Trust. They encouraged the IMF staff to consult with current PRGF Trust lenders on the expansion of the Loan Account of the PRGF Trust. Following the consultation with lenders, the IMF Executive Board will consider whether to amend the PRGF and PRGF-HIPC Trusts to permit interim PRGF lending under the PRGF Trust.
in Figure 1:
22. All HIPC Initiative assistance provided by the PRGF-HIPC Trust is disbursed from the HIPC sub-account to the beneficiaries; HIPC Initiative assistance in the form of grants is transferred to the beneficiary country's account managed by the IMF, as Trustee of the PRGF-HIPC Trust. The investment earnings on resources generated from gold sales held in the SDA will be made available to the HIPC sub-account to meet the costs of the HIPC Initiative. As the HIPC sub-account is replenished over time, it will repay the PRGF-HIPC sub-account. To preserve the value of resources for the continuation of PRGF operations, the HIPC sub-account will pay interest on the use of resources of the PRGF-HIPC sub-account at a rate equal to the average return on investment of SDA resources.
23. Financial statements of the PRGF-HIPC Trust are published. All transactions and each sub-account of the Trust are separately disclosed in published financial statements. These accounts are audited by the external audit firm selected under Section 20 of the IMF's By-Laws, whose report, together with the financial statements, is published in the IMF's Annual Report.
1 See David Andrews and others, Debt Relief for Low-Income Countries: The Enhanced HIPC Initiative, IMF Pamphlet Series No. 51, November 1999, for a comprehensive description of the HIPC Initiative.
2 See Poverty Reduction and Growth Facility (PRGF) on http://0-www-imf-org.library.svsu.edu/external/fin.htm.
3 National Bank of Belgium, Government of Canada, Government of China, National Bank of Denmark, Central Bank of Egypt, Agence Française de Développement, Kreditanstalt für Wiederaufbau (Germany), Bank of Italy, Japan Bank for International Cooperation, Bank of Korea, the Nederlandsche Bank, Bank of Norway, OPEC Fund for International Development, Bank of Spain, Government of Spain, Swiss Confederation, and the Swiss National Bank.
4 All figures expressed in NPV terms refer to end-2000 net present values.
5 These estimates exclude Liberia, Somalia, and Sudan, which have been in arrears to the IMF and other international institutions for many years. When these countries are in a position to clear these arrears, resolving their debt problems will require an extraordinary support effort by the international community as a whole. Total costs to creditors in NPV terms for Liberia, Somalia, and Sudan are estimated at US$9.1 billion under the enhanced HIPC Initiative.
6 The estimated subsidy requirements for the interim PRGF exclude subsidy needs associated with the possible use of the PRGF by Liberia, Somalia, and Sudan during the interim period.
7 In April 1999, the participants in the New Arrangements to Borrow (NAB) unanimously decided that, as a condition for the activation of the NAB to finance purchases by Brazil under the Supplemental Reserve Facility (SRF), one-third of the surcharge on outstanding SRF purchases made by Brazil be transferred to the PRGF-HIPC Trust.