Abstract

The Initiative is intended to deal comprehensively with the overall external debt burden of eligible countries, reducing it to a sustainable level within a reasonable period of time. A country can be considered to achieve external debt sustainability if it is expected to be able to meet its current and future external debt-service obligations in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without compromising growth.

The Initiative is intended to deal comprehensively with the overall external debt burden of eligible countries, reducing it to a sustainable level within a reasonable period of time. A country can be considered to achieve external debt sustainability if it is expected to be able to meet its current and future external debt-service obligations in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without compromising growth.

Key Features

The HIPC Initiative is based on the following principles:

  • The Initiative targets overall debt sustainability on a case-by-case basis, thus providing a permanent exit from the rescheduling process.

  • Creditors envisage providing debt relief only after the debtor country has demonstrated the capacity to use prudently whatever debt relief is granted.

  • Additional debt relief is granted on top of existing (traditional) debtrelief mechanisms.3

  • Debt-relief measures under the Initiative are coordinated among all creditors involved, with broad and equitable participation.

  • Steps taken by multilaterals are in line with their status as preferred creditors and will preserve their financial integrity.

  • New financing for the HIPCs is on appropriately concessional terms.

Eligibility Under the Initiative

The criteria for eligibility under the Initiative reflect both the principles underlying the Initiative and a broad-based consensus of member governments that the poorest countries should have the highest priority in concessional debt relief. Specifically, eligibility for receiving exceptional assistance is limited to countries eligible for International Development Association (IDA) loans and for the Enhanced Structural Adjustment Facility (ESAF) that have established strong track records of performance under programs supported by the IMF and the World Bank and that are not expected to achieve a sustainable external debt situation even after the full use of traditional debt-relief mechanisms.

The key indicator of external debt sustainability used in the Initiative is the ratio of the net present value (NPV) of debt to exports.4 Under the initial framework of the Initiative applied through the fall of 1999, assistance was only provided where necessary to bring the NPV of debt—after the full use of traditional mechanisms—to a range of 200 to 250 percent of exports. The target NPV of debt-to-export ratio within this range for a qualifying country was determined using country-specific “vulnerability factors”; these include the concentration and variability of export earnings, the fiscal burden of external debt service, external debt in relation to GDP, the resource gap, the level of international reserves, and the burden of private sector debt.

In addition, countries with very open economies (defined as having an export-to-GDP ratio of at least 40 percent) and making strong efforts to generate revenue (indicated by fiscal revenues of at least 20 percent of GDP) could also be considered eligible for assistance under the Initiative if the NPV of their debt exceeded 280 percent of government revenues.

Implementation of the Initiative

To qualify for assistance under the Initiative, an eligible country enters into a macroeconomic reform and structural adjustment program supported by the IMF and the World Bank, with concessional financing. The requirement of establishing a track record is intended to ensure that countries are in a position to use the additional resources effectively. In support of their adjustment programs, the debtor country also receives flow-reschedulings from Paris Club official creditors on Naples terms (67 percent NPV reduction) and seeks at least comparable treatment from non-Paris Club official bilateral and commercial creditors on debt owed to them. After successfully establishing a track record for three years (first stage) under these adjustment programs and rescheduling agreements with the Paris Club, a country reaches its decision point (see Figure 1). At the decision point, the Executive Boards of the IMF and World Bank determine the country’s eligibility for assistance under the Initiative on the basis of the results of a comprehensive (loan-by-loan) debt sustainability analysis agreed jointly by IMF and World Bank staff and the country authorities. The results of the debt sustainability analysis allow the Boards to assess whether the full application of traditional debt-relief mechanisms (Paris Club stock-of-debt operation on Naples terms involving a 67 percent NPV reduction with at least comparable action from non-Paris Club official bilateral and commercial creditors) would be sufficient for the country to reach the targeted levels of debt indicators, or whether assistance would be required under the Initiative.

Figure 1.
Figure 1.

Summary of Enhanced HIPC Initiative Eligibility Requirement: IDA-only and ESAF (PRGF)-Eligible

Where a country is deemed eligible for assistance under the Initiative, the assistance is delivered at the completion point. During the period between the decision point and the completion point (the second or interim stage), the country continues implementing macroeconomic reform and structural adjustment polices supported by concessional lending from the IMF and World Bank. At the same time, Paris Club creditors provide flow reschedulings on Lyon terms (involving up to 80 percent NPV reduction) as needed on a case-by-case basis and commit to providing at the completion point a stock-of-debt operation on Lyon terms, provided the program supported by the IMF and the World Bank is implemented satisfactorily. Other official bilateral and commercial creditors would be expected to offer at least comparable terms for the flow rescheduling and for the stock-of-debt operation. Donors, official bilateral creditors, and multilateral institutions provide financial assistance in the form of grants and concessional loans; the World Bank provides IDA grants and supplemental IDA allocations during this period. At the completion point, the stock-of-debt operation on Lyon terms committed to by Paris Club creditors at the time of the decision point takes effect, and multilateral institutions provide the committed reduction in the NPV of their claims proportional to that provided by bilateral creditors as a group. The IMF provides assistance to a country at the completion point through a special ESAF grant5 paid into an escrow account and used to cover debt service to the IMF. The World Bank provides assistance at the completion point through the HIPC Trust Fund.

The six-year performance period under the Initiative has been implemented flexibly on a case-by-case basis, with countries receiving credit for already established track records (including for programs supported by IMF emergency assistance for postconflict situations)6 leading up to the decision point. The period of three years between the decision and the completion point has been shortened for six of the seven countries that have so far reached decision points and been judged eligible for assistance.

Progress in Implementation

From the inception of the HIPC Initiative until September 1999, the Executive Boards of the World Bank and IMF considered 14 countries for eligibility under the HIPC Initiative and agreed to extend assistance to seven (in chronological order): Uganda, Bolivia, Burkina Faso, Guyana, Côte d’Ivoire, Mozambique, and Mali (see Table 1). Assuming continuing good policy performance, debt relief expected for all seven countries under the initial framework of the HIPC Initiative totals more than $6 billion in nominal terms and will reduce the NPV of all these countries’ debt by over $3 billion, or an average of one-fifth.

Table 1.

Relief Under the Original HIPC Initiative

article image

In April 1998, Uganda became the first country to reach its completion point under the HIPC Initiative. Uganda is receiving assistance equivalent to approximately $650 million in nominal terms, or 20 percent of its outstanding debt; this reduced Uganda’s NPV of debt-to-export ratio to less than 200 percent. The IMF has provided funds covering about $80 million of debt service over the next nine years.7

In September 1998, Bolivia reached its completion point under the HIPC Initiative. Total nominal debt relief is about $760 million. The NPV of debt-to-export ratio is reduced to 218 percent and the debt-service ratio will be reduced to about 19 percent in 1999 from 26 percent in 1997. Additional action by a significant bilateral creditor on official development assistance (ODA) claims has reduced the outcome on the NPV of debt-to-export ratio to about 200 percent. In view of Bolivia’s relatively high debtservice ratio, delivery of this assistance will be front-loaded, with 40 percent provided by 2002. The IMF’s assistance of $30 million in debt-service relief will cover 20 percent of Bolivia’s annual debt service to the IMF during 1998–2002.

In May 1999, Guyana reached its completion point under the HIPC Initiative and began to receive assistance amounting to $410 million in nominal terms. Of this amount, about $40 million is provided by the IMF, which will cover on average about 26 percent of Guyana’s annual debt service to the IMF over the next nine years. In NPV terms, Guyana’s creditors will provide debt relief of about $256 million, reducing the NPV of debt-to-export ratio to 115 percent. Guyana was deemed eligible for assistance under the Initiative’s fiscal window.

Mozambique reached its completion point in June 1999. The IMF and IDA agreed to increase the assistance beyond the $2.9 billion originally committed in April 1998 to ensure that Mozambique reached the agreed debt sustainability target of an NPV of debt-to-export ratio of 200 percent. The total debt-relief package is about $3.7 billion, or $1.7 billion in NPV terms, of which $145 million will be provided by the IMF to cover part of the debt service falling due to the IMF. This is the largest debt-relief operation by the international financial community under the HIPC Initiative so far, and it reduced Mozambique’s debt by almost two-thirds. The debt reduction package was achieved through exceptional efforts by Paris Club creditors in providing assistance on NPV of debt reduction on eligible debt of 90 percent and the provision by Russia—Mozambique’s largest creditor—of special treatment on post-cutoff date debt, by bilateral donors in providing voluntary contributions, and the World Bank and IMF in providing more than their proportional share of assistance.

In addition, three countries have reached their decision points and have received commitments of assistance under the HIPC Initiative: Burkina Faso, Côte d’Ivoire, and Mali. Assuming continued good performance in programs supported by the IMF and World Bank, and assurances that other creditors will provide their share of debt relief, Mali could reach its completion point in 1999, Burkina Faso in 2000, and Côte d’Ivoire in 2001. Côte d’Ivoire was deemed eligible for assistance under the Initiative’s fiscal window.

Benin and Senegal reached their decision points in July 1997 and April 1998, respectively, and were assessed to face sustainable debt burdens after traditional debt-relief mechanisms and, therefore, were deemed not to require assistance under the initial framework of the HIPC Initiative. Their eligibility—along with all the other countries described above—will be reassessed under the enhanced HIPC Initiative.

Preliminary discussions have been held for Guinea-Bissau, Ethiopia, Mauritania, Nicaragua, and Tanzania. By the end of 2000, the eligibility of additional countries—including possibly Cameroon, Chad, Ghana, Guinea, Honduras, Malawi, Niger, Republic of the Congo, Rwanda, Sierra Leone, Togo, Vietnam, Yemen, and Zambia—is expected to be reviewed under the HIPC Initiative. Not all are expected to require assistance.

3

Traditional debt-relief mechanisms include the adoption of stabilization and economic reform programs supported by concessional loans from the IMF and the World Bank; in support of these adjustment programs, flow-rescheduling agreements with Paris Club creditors on concessional terms (such as a 67 percent net present value reduction under Naples terms) followed by a stock-of-debt operation after three years of good track records under both the IMF arrangements and rescheduling agreements; agreement by the debtor country to seek at least comparable terms on debt owed to non-Paris Club bilateral and commercial creditors facilitated by IDA debt-reduction operations on commercial debt; bilateral forgiveness of official development assistance debt by many creditors; and new financing on appropriately concessional terms. See footnote 14 for estimates of debt relief under the traditional mechanisms.

4

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 below the prevailing market rate. The NPV of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted at the market interest rate. Whenever the interest rate charged for a loan is lower than the market interest rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element. This measure can also provide an assessment of the total debt burden. In contrast, the debtservice ratio in any one year captures only the immediate cash flow impact of external debt and is strongly influenced by the maturity structure of the underlying debts.

5

In countries facing a hump of debt service, a loan could be provided; in practice, all assistance to date has been in the form of grants, which is expected to continue.

6

As agreed in September 1998.

7

Recent updating of the debt sustainability analysis indicates that since the completion point the NPV of debt-to-export ratio for Uganda is estimated to have risen to 240 percent at the end of 1999 and, in the absence of enhanced HIPC assistance, is estimated to remain above 200 percent over the next three years, partly reflecting lower export earnings from a decline in coffee prices.

Th E HPIC initiative (Revised'99)
  • View in gallery

    Summary of Enhanced HIPC Initiative Eligibility Requirement: IDA-only and ESAF (PRGF)-Eligible