Abstract

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 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.

Since the onset of the debt crisis in the early 1980s, which affected both middle- and low-income countries, the debt situation of middle-income debtor countries has improved significantly. Many of these countries have benefited from concerted support by the international financial community. This support has been provided in the form of Paris Club flow reschedulings (Table 1), stock-of-debt arrangements under the Brady plan, and adjustment programs supported by the multilateral financial institutions. These instruments have proved to be effective mechanisms for allowing countries to normalize relations with external creditors and to resume sustainable growth. Recent years have witnessed a reentry to international capital markets by many middle-income countries that had been most severely affected by the debt crisis.

Table 1.

Status of Paris Club Rescheduling Countries

(As of September 30, 1997)

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Source: Paris Club.Notes: Includes agreements of Russia and Turkey with official bilateral creditors; stock treatment underlined. Dates refer to end of current or last consolidation period. In the case of a stock-of-debt operation, canceled agreements, or rescheduling of arrears only, date shown is that of relevant agreement.

* denotes rescheduling on London terms, and ** denotes rescheduling on Naples terms. + denotes countries for which Paris Club creditors have indicated their willingness to provide debt relief on Lyon terms in the context of the HIPC Initiative. # denotes stock treatment subject to decisions (not yet made) on eligibility for assistance under the HIPC Initiative.

Defined here as countries that obtained lower-middle-income but not concessional terms with Paris Club reschedulings.

For some countries, this inevitably represents an element of judgment: in certain circumstances, for example, if hit by an external shock, a country may need further reschedulings. Some of the low-income countries may be eligible for enhanced action under the HIPC Initiative.

Rescheduling of arrears only.

Limited deferral of long-standing arrears to three creditors on nonconcessional terms.

Nonconcessional rescheduling at the authorities’ request.

The 1994 rescheduling agreement was canceled at the authorities’ request.

Agreement includes a reprofiling of the stock of certain debts at the end of the consolidation period.

Involved debt relief of 50 percent in NPV terms.

Agreement subject to entry-into-force clause.

Former Socialist Federal Republic of Yugoslavia.

Last rescheduling on Toronto terms.

However, the HIPCs, most of which are in sub-Saharan Africa, have continued to find it difficult to meet their external debt-service obligations. The difficulties can be traced to a combination of several factors. These include (1) external shocks, such as a deterioration in the terms of trade, and adverse weather conditions; (2) civil strife; (3) the lack of sustained adjustment or implementation of structural reforms; (4) the lending policies of many creditors, especially the provision of loans at commercial interest rates with short repayment periods; (5) the lack of prudent debt-management policies by debtor countries, driven in part by excessive optimism by creditors and debtors about the prospects for increasing export earnings to build debt-servicing capacity; and (6) the lack of careful management of the currency composition of external debt. All these factors contributed to increasing the debt burden of the HIPCs.

In several important respects, the external position of the HIPCs differs widely from country to country (Table 2). For example, in 1994, for some HIPCs the external current account was in surplus, while for others deficits exceeded 100 percent of exports. In addition, scheduled debt-service obligations varied widely—from less than 20 percent of exports for some countries to more than 100 percent for others, while the actual debt service paid ranged from 5 percent of exports to as much as 50 percent. Finally, the HIPCs are indebted to a variety of creditors, including Paris Club bilateral creditors, non-Paris Club bilateral creditors, commercial banks, and multilateral institutions (Table 3 and Figure 1).

Table 2.

HIPCs: Indicators of External Debt Burden1

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Source: IMF staff estimates.

All data refer to 1996 (1995/96) unless otherwise indicated.

Excluded are those HIPCs for which no debt sustainability analysis has been prepared (Angola, Burundi, the Central African Republic, Liberia, Myanmar, and Somalia).

Excluding workers’ remittances. For the NPV ratio, present value of external debt service on disbursed public and publicly guaranteed debt in percent of the average of exports of goods and services over three years ending in 1996. For debt service ratio, one year of exports, 1996 is used.

Defined as the standard deviation in export values over the ten-year period 1986-95 (1985/86-1994/95), in percent of the average.

Current account balance excludes interest and net official transfers.

Imports of goods and services.

After assumed debt rescheduling or relief, including Paris Club stock-of-debt operation on Naples terms, where applicable.

Excluding grants.

Central government. For Bolivia, Burkina Faso, the Lao People’s Democratic Republic, Madagascar, Mali, Nicaragua, and Vietnam, government refers to general government.

Table 3.

HIPCs: Characteristics of Existing External Debt

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Sources: World Bank Debtor Reporting System; and IMF staff estimates.

Total public and publicly guaranteed debt.

✓ indicates whether Paris Club concessional rescheduling has taken place.

✓ indicates significant debt to the respective creditor.

Stock-of-debt operation on Naples terms was agreed in 1995 or 1996.

Figures for 1993.

Exit rescheduling, no stock-of-debt clause.

Figure 1.
Figure 1.

Developing Countries: Public External Debt by Creditor

(In billions of U.S. dollars)

Sources: World Bank Debtor Reporting System; and IMF, InternationalFinancialStatistics.Note: Medium- and long-term public and publicly guaranteed debt, including to the IMF.1 The estimates for 1996 are provisional.

Recognizing the highly varied external positions among the HIPCs, the international financial community has addressed the debt problems of these countries in a manner that takes into account the total debt of the country concerned and ensures that debt relief is given in support of adjustment by debtors on a case-by-case basis, tailored to the individual circumstances of each debtor country.

The Enhanced HIPC Initiative
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    Developing Countries: Public External Debt by Creditor

    (In billions of U.S. dollars)