At their meetings in September 1996, the IMF’s Interim Committee and the IMF and World Bank’s Development Committee endorsed specific proposals put forward jointly by the IMF and the World Bank to address the problems of a limited number of HIPCs that follow sound policies, but for which traditional debt-relief mechanisms are inadequate to secure a sustainable external debt position over the medium term. The Committees requested the two institutions to proceed quickly with the implementation of the Initiative.
The HIPC Initiative is not a panacea for all of the economic problems of the HIPCs. Even if, hypothetically, all of the external debts of the HIPCs were forgiven, most would still continue to need large-scale concessional external assistance; as noted earlier, currently their receipts of such assistance are much larger than their debt-service payments. Given their high levels of poverty and limited domestic resources available to meet the costs of social programs that address the needs of the poor, most HIPCs are likely to continue to be dependent on aid. The HIPC Initiative does not imply a cessation of aid to HIPCs: if it leads to withdrawal of aid, it will fail. However, given the pressures on aid budgets in major donor countries, which are likely to prevail in the foreseeable future, continuing aid will be most effective if it catalyzes private financial flows, particularly investment. There is a limit to the extent to which these flows can be debt creating, if future overindebtedness is to be avoided. This suggests a need for institution building that is essential for attracting private investment as well as for providing support for putting in place necessary infrastructure.
This paper analyzes the IMF’s Enhanced Initiative for Heavily Indebted Poor Countries, which provides debt relief for low-income countries. The paper highlights that countries affected by the debt crisis of the 1980s received concerted support from the international financial community in the form of Paris Club flow reschedulings, stock-of-debt operations under the Brady plan, and adjustment programs supported by the multilateral financial institutions. These measures proved effective in significantly improving the debt situation of many middle-income countries.
This pamphlet describes the IMF-World Bank initiative begun in 1996 to address in a comprehensive manner the overall debt burden of eligible heavily indebted poor countries (HIPCs) pursuing programs of adjustment and reform supported by the two organizations. The aim of the Initiative is to reduce these countries debt to sustainable levels so that they can meet current and future debt service obligations without unduly compromising growth. This pamphlet describes the rationale for and the main features of the Initiative as it was originally conceived in 1996 and its implementation through the fall of 1999, which culminated in the approval of an enhanced HIPC Initiative in late 1999 that is aimed at providing deeper and more rapid debt relief to a larger number of countries. The enhanced HIPC Initiative also seeks to ensure that debt relief is integrated into a comprehensive poverty reduction strategy that is developed with broad-based participation and tailored to the country's circumstances.
Countries affected by the debt crisis of the 1980s received concerted support from the international financial community in the form of Paris Club flow reschedulings (rescheduling of debt service falling due), stock-of-debt operations (reduction in the stock of outstanding debt) under the Brady plan, and adjustment programs supported by the multilateral financial institutions. These measures proved effective in significantly improving the debt situation of many middle-income countries. A number of poor countries, especially those in sub-Saharan Africa, however, continued to face difficulties in meeting their external debt-servicing obligations because of a confluence of factors. These included the accumulation—through, among other things, provision by creditors of official export credits and poor external debt-management strategies in the debtor countries—of significant nonconcessional debt, a deterioration in debtors’ terms of trade, vagaries of weather, protracted civil wars, weak economic policies, and weaknesses in governance.1
Bilateral creditors. These creditors are governments. Their claims are loans extended by, or guaranteed by, governments or official agencies, such as export credit agencies. Certain official creditors participate in debt reschedulings under the aegis of the Paris Club (see below).
The HIPC Initiative is a framework developed jointly by the IMF and the World Bank to address the external debt problems of the heavily indebted poor countries (HIPCs). It is based on the following guiding principles: (I) the objective is to target overall debt sustainability on a case-by-case basis, focusing on the totality of a country’s debt; (2) actions should be envisaged only when the debtor has shown, through a track record, ability to put to good use the exceptional support provided; (3) the new measures should build, as much as possible, on existing mechanisms; (4) additional action should be coordinated among all creditors involved, with broad and equitable participation; (5) action by multilateral creditors should preserve their financial integrity and preferred creditor status; and (6) new external finance for the indebted countries should be on appropriately concessional terms.
The traditional mechanisms for dealing with the debt problems of low-income countries are sufficiently robust to deal with the debt burden of many HIPCs and to reduce their external debts to sustainable levels (see definition below). As noted earlier, the external positions of the HIPCs vary widely and indeed some countries such as Ghana, Kenya, and the Lao People’s Democratic Republic have never received concessional reschedulings from the Paris Club. Others, such as Equatorial Guinea and Vietnam, are unlikely to need the full use of traditional debt-relief mechanisms in order to reach debt levels that are sustainable. However, even with sound economic policies and full use of traditional mechanisms for rescheduling and debt reduction and the continued provision of concessional financing, a number of countries are not expected to reach sustainable levels of debt within a reasonable period of time. To deal with this problem, the IMF and World Bank jointly proposed and put in place in September 1996 the HIPC Initiative that aims at reducing the debt burdens of all eligible HIPCs to sustainable levels, provided they adopt and pursue strong programs of adjustment and reform. The Initiative builds on instruments available to the international community to deal decisively with the debt problems of the low-income countries and allows them to exit, once and for all, from the rescheduling process.
Anke Hoeffler, Ms. Catherine A Pattillo, and Mr. Paul Collier
This paper sets flight capital in the context of portfolio choice, focusing upon the proportion of private wealth that is held abroad. There are large regional differences in this proportion, ranging from 5 percent in South Asia to 40 percent in Africa. We explain cross-country differences in portfolio choice by variables that proxy differences in the risk-adjusted rate of return on capital. We apply the results to four policy questions: how the East Asian crisis affected domestic capital outflows; herd effects; the effect of the IMF-World Bank debt relief initiative for heavily-indebted poor countries (HIPC) on capital repatriation; and why so much of Africa’s private wealth is held outside the continent.
This paper examines a number of structural factors affecting the external debt sustainability of HIPC completion point countries. It shows that (i) while comparing favorably with other lowincome countries, the policy and institutional frameworks of completion point countries in general are still relatively weak, and their debt management practices remain inferior to international standards; and (ii) their export base remains narrow and fiscal revenue mobilization lags behind, even compared with many other low-income countries. Achieving and maintaining long-term debt sustainability in completion point countries will require continued structural reforms, timely donor support, and close monitoring of new borrowing in support of sound macroeconomic policies.