The IMF has played a central role, through its policy guidance and financial support, in helping member countries cope with external debt problems. The IMF’s ultimate objective is to ensure that debtor countries achieve sustainable growth and balance of payments viability and establish normal relations with creditors, including gaining access to international financial markets. The basic elements of the IMF’s debt strategy remain the same, even though the instruments it uses have evolved over time:
promote growth-oriented adjustment and structural reform in debtor countries,
maintain a favorable global economic environment, and
ensure adequate financial support from official (bilateral and multilateral) and private sources.
Official bilateral debt rescheduling
Debtor countries seeking to reschedule their official bilateral debt typically approach the Paris Club—an informal group of creditor governments, mainly those of the Organization for Economic Cooperation and Development. Under such rescheduling agreements, debtor countries may generally reschedule their arrears and the current maturities of eligible debt service falling due during an IMF arrangement, with repayment stretching over many years. To ensure that such relief helps countries restore balance of payments viability and achieve sustainable economic growth, the Paris Club links debt relief to the formulation of an economic program supported by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw on the IMF’s analysis and assessment of countries’ balance of payments and debt situations.
Over the past two decades, rescheduling has proved effective for some distressed middle-income countries, which have managed to return to financial stability. For low-income countries, the Paris Club began not only to reschedule but also to reduce their debts in the late 1980s. Although the terms for these reschedulings became increasingly concessional over the years in an effort to bring more lasting relief, many poor countries did not grow as rapidly as had been hoped and their debt remained high. For these low-income, heavily indebted countries, creditors recognized the need for a new approach.
Net present value of debt
The face value of the external debt stock is not a good measure of a country’s debt burden if a significant part of the external debt is contracted on concessional terms with an interest rate that is lower than the prevailing market rate. The net present value of debt, which takes into account the degree of concessionality, is the sum of all future debt-service obligations (interest and principal) on existing debt, discounted at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting net present value of debt is smaller than its face value, with the difference representing the grant element.
In 1996, the IMF and the World Bank jointly developed the Heavily Indebted Poor Countries (HIPC) Initiative to help resolve the debt problems of poor countries that had been unable to reduce their external debt to manageable levels through traditional debt-relief mechanisms, even when they followed sound policies. The HIPC Initiative provides exceptional assistance to eligible countries to reduce their external debt burden to levels that they can service through their export earnings, aid, and capital inflows without compromising long-term economic growth and poverty reduction. This exceptional assistance, which entails a reduction in the net present value (see box, this page) of the public external debt of the indebted country, is expected to free up resources in debtor countries to reduce poverty and invigorate growth.
The HIPC Initiative is a comprehensive, integrated, and coordinated approach to external debt and marks the first time that multilateral, Paris Club, and other official bilateral and commercial creditors have united in an effort to reduce the debt stock of the world’s most indebted poor countries through a combination of sound policies, generous debt relief, and new inflows of aid.
Early progress with the initiative was slow. As a result of a review and extensive public consultations, the HIPC Initiative was enhanced in 1999 to provide deeper, broader, and faster debt relief to eligible countries, which are expected to use the resources that are freed up for poverty reduction. About 40 countries are expected to benefit from HIPC relief.
Poverty Reduction and Growth Facility
In September 1999, the IMF also broadened the objectives of its concessional lending to low-income member countries to include an explicit focus on poverty reduction in the context of a growth-oriented strategy. It replaced the Enhanced Structural Adjustment Facility with the Poverty Reduction and Growth Facility (PRGF). The goals and policies embodied in a country’s PRGF-supported program will derive directly from the country’s own poverty reduction strategy (see below). Conditionality under the PRGF is expected to emphasize the social impact of major reforms and governance, and many countries with PRGF-supported programs also obtain debt relief under the HIPC Initiative.
During financial year 2001, the IMF approved 14 new PRGF Arrangements for Benin, Cameroon, Ethiopia, Georgia, Guinea-Bissau, Kenya, the Lao People’s Democratic Republic, Lesotho, the former Yugoslav Republic of Macedonia, Madagascar, Malawi, Moldova, Niger, and Vietnam. It committed a total of SDR 1.2 billion under the new arrangements and also approved increases totaling SDR 101.3 million in the existing arrangements for Ghana, Kenya, and Madagascar. During the financial year, the IMF disbursed SDR 0.6 billion under the PRGF, compared with SDR 0.5 billion last year. As of April 30, 2001, 37 members had reform programs supported by PRGF Arrangements, with IMF commitments totaling SDR 3.3 billion and undrawn balances of SDR 2.0 billion. During the year, the IMF decided that the growth prospects and external positions of China, Egypt, and Equatorial Guinea had improved to the extent that they are no longer eligible for assistance under the PRGF. Thus, the number of countries eligible under this facility declined from 80 last year to 77.
Qualifying for the HIPC Initiative and PRGF
To qualify for assistance under the enhanced HIPC Initiative, or for loans on concessional terms from the IMF or the World Bank, countries are expected to produce a poverty reduction strategy paper (PRSP) that the government prepares with the active participation of civil society, nongovernmental organizations, and international donors and institutions, so that it reflects the country’s individual circumstances. Each country’s strategy will describe the main characteristics of poverty and outline the appropriate antipoverty strategies over the medium and long term. Countries are expected to provide an annual progress report on the implementation of the strategies and an update of the PRSPs every three years. These homegrown PRSPs are expected to generate fresh ideas about the measures that will enable the country to achieve shared growth and poverty-reduction goals and to enhance ownership and national commitment to reaching them.
Achievements under the HIPC Initiative
By early July 2001, 23 countries (19 of them in Africa) had reached their decision points under the enhanced HIPC Initiative, and 1 under the original initiative. The IMF has committed SDR 1.3 billion to these countries in HIPC Initiative grants. This initiative, along with others, will reduce these countries’ external debts, on average, by about two-thirds in net present value terms (from $53 billion to $20 billion). Resources are expected to be allocated to education; health care, including HIV/AIDS prevention and treatment; rural development and water supply; and road construction. Two countries, Uganda and Bolivia, have reached the point where they received unconditionally all debt relief committed under the initiative, and several more are expected to reach the completion point by the end of 2001.
In preparing for the spring meetings in April 2001, the Executive Board agreed that HIPC debt relief would provide a good basis for the HIPCs to achieve long-term debt sustainability; however, debtor countries must also continue to pursue sound macroeconomic management and structural reforms, supported by adequate concessional external resources and greater access to industrial country markets for their exports. The Board also emphasized that the heavily indebted poor countries should take steps to create an environment favorable to private economic activity and investment and urged them to strengthen debt management by improving transparency and accountability and coordinating debt management with monetary and fiscal policies.
The first challenge is to bring more heavily indebted poor countries to their decision points. What makes this challenge particularly difficult is that many of the countries that have not yet qualified for HIPC relief are either engaged in, or have recently ended, domestic or cross-border armed conflict. Their need for debt relief is particularly acute because they suffer from abject poverty and face major reconstruction tasks. Many are also struggling with severe governance problems. These countries require help to develop a track record of good policy performance that will allow them to move toward their decision points and begin receiving debt relief. The second challenge is to keep the countries that have reached their decision points on track to implement sound, poverty-reducing policies so that they can reach their completion points under the HIPC Initiative and achieve sustainable growth.
Complete debt forgiveness
There have been repeated appeals to the international community to simply erase all the debt of the world’s poorest countries, but such a step would not be the most effective or equitable way to support the fight against poverty with the limited resources available. Today’s greatest development challenge–reducing world poverty–requires a comprehensive strategy that includes the efforts of the poorest countries to help themselves, as well as increased financial assistance from the international community and improved access to industrial country markets. Debt relief under the HIPC Initiative is only one element of the international support for poor countries that removes debt as an obstacle to growth. For many years to come, these countries will continue to need financial support on concessional terms to help them implement their growth and poverty reduction strategies and stand on their own feet.
Total debt cancellation would imperil the funds that multilateral creditors would have for future lending and would come at the expense of resources available to other developing countries, some of which are equally poor but have less external debt. Over 80 percent of the world’s poor live in countries that are not HIPCs. For the IMF, total debt cancellation would exhaust the resources that finance the PRGF and the HIPC Initiative, and the IMF would have to stop providing concessional support to its poorest members.