For 41 low-income countries, mostly in Africa, the external debt situation has become extremely difficult. The IMF and the World Bank have designed a framework—the HIPC Initiative—to provide special assistance for those that pursue adjustment and reform programs supported by the two institutions but for which traditional debt-relief mechanisms do not go far enough. The HIPC Initiative entails coordinated action by the international financial community to reduce these countries’ debt burden to sustainable levels—that is, to levels that will enable them to comfortably service their debt through export earnings, aid, and capital inflows.
How the HIPC Initiative works
First phase. To qualify for assistance, the country must adopt adjustment and reform programs supported by the IMF and the World Bank and pursue those programs for three years. During that time, it will continue to receive traditional concessional assistance from all the relevant donors and multilateral institutions, as well as debt relief from bilateral creditors.
Decision point. At the end of the three years, an analysis of the country’s external debt situation will be carried out. It is essentially a medium-term balance of payments projection that assesses the country’s debt burden and its ability to meet those obligations. If the country’s external debt ratios fall within or above applicable ranges, it will be considered for special assistance. The ranges are 200-250 percent for the present value of debt to exports, and 20-25 percent for the ratio of debt service to exports.
At the decision point, the Executive Boards of the IMF and the World Bank will formally decide on a country’s eligibility, and the international community will commit to provide enough aid at the completion point (see below) for the country to achieve debt sustainability. The assistance committed by the IMF and the World Bank will depend on satisfactory assurances of action by other creditors.
Second phase. Once eligible for support under the HIPC Initiative, the country must—for three additional years—perform satisfactorily under programs supported by the IMF or the World Bank. This period may be shortened for countries that already have a sustained record of strong performance. During this phase, bilateral and commercial creditors are generally expected to reschedule obligations coming due, with a reduction in present value of up to 80 percent.
Completion point. Creditors provide assistance at this juncture in a variety of forms, which may include up-front debt reduction or debt-service reduction, debt buybacks, or grants.
Strengthening the HIPC Initiative
The Interim and Development Committees have endorsed a strengthening of the current framework of the initiative to provide deeper debt relief to strengthen countries’ incentives to adopt and implement economic and social reform programs and that provides a clear exit from unsustainable debt burdens. The IMF and the World Bank will consider proposals to enhance this framework in the run-up to their annual meetings scheduled for late September.