Debt Relief Under the HIPC Initiative
Context and Outlook for Debt Sustainability and Resource Flow
Author: Ms. Doris C Ross and Mr. Lisandro Abrego1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Publication Date:
01 Sep 2001
eISBN:
9781451856446
Language:
English
Keywords:
HIPC government guarantee; HIPC document; HIPC country document; HIPCs borrower; HIPC debt service
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This paper discusses the Heavily Indebted Poor Countries (HIPC) Initiative in the perspective of sizable historical debt relief and large positive net resource flows to HIPCs. It argues that, by substantially reducing HIPCs’ debt stocks and debt service payments, the Initiative provides a solid basis for debt sustainability and room for increased social spending. For poverty reduction, HIPC relief is important but broader international support is needed. The paper maintains that, as experience has shown, external support can be effective only if it reinforces sound policies implemented by HIPCs themselves. Thus, debt relief and official development assistance are critical as “help for self-help.”

Abstract

This paper discusses the Heavily Indebted Poor Countries (HIPC) Initiative in the perspective of sizable historical debt relief and large positive net resource flows to HIPCs. It argues that, by substantially reducing HIPCs’ debt stocks and debt service payments, the Initiative provides a solid basis for debt sustainability and room for increased social spending. For poverty reduction, HIPC relief is important but broader international support is needed. The paper maintains that, as experience has shown, external support can be effective only if it reinforces sound policies implemented by HIPCs themselves. Thus, debt relief and official development assistance are critical as “help for self-help.”

I. INTRODUCTION AND SUMMARY

The external debt levels of low-income countries have mounted over the last two decades. At the same time, efforts have intensified to alleviate this burden. Since the late 1980s, when industrial countries first agreed to reschedule low-income countries’ debts on concessional terms in the context of the Paris Club (Toronto terms), the degree of debt forgiveness (grant element) has been increased in several steps. By the mid-1990s, under what came to be known as Naples terms, Paris Club creditors were forgiving two-thirds of low-income countries’ eligible debts. Despite these efforts, some low-income countries, especially those in sub-Saharan Africa, continued to face heavy external debt burdens and difficulties with servicing them, sometimes repeatedly resorting to debt rescheduling. This often reflected a combination of factors, including a lack of perseverance with structural and economic reform programs, a deterioration in their terms of trade, poor governance, and also a willingness of creditors to continue to provide new loans.

The Heavily Indebted Poor Countries (HIPC) Initiative, launched in September 1996 by the IMF and the World Bank, is an evolution of traditional debt relief efforts. Unlike them, however, the HIPC Initiative involves for the first time debt relief from multilateral financial institutions. The Initiative’s main purpose is the reduction of eligible countries’ external debt burdens to sustainable levels and the elimination of any debt overhang that might be a hindrance to growth and investment. The Initiative was reviewed and enhanced in late 1999 to provide faster and deeper debt relief to a larger number of countries. The enhanced Initiative is expected to benefit close to 40 low-income countries, of which 23 have reached their decision points and have started to receive debt relief as of July 2001.

The enhanced HIPC Initiative provides substantial debt relief to eligible countries by reducing their overall debt stocks by about one-half. Three points should be noted. First, this builds on debt reduction under traditional mechanisms over the last decade or so, which already reduced debts by about half for the countries that are expected to require HIPC relief. Combining traditional and HIPC relief over time, the external debt of these countries will be reduced in total by some 80 percent. Second, the Initiative lowers debt service payments for the 23 decision point HIPCs on average by about one-third to 8 percent of exports—this is less than half the debt service ratio paid by other developing countries. While debt service payments by HIPCs are declining, social spending is increasing and projected to reach more than three times the level of debt service payment by 2002. Third, the Initiative provides a solid basis for HIPCs to achieve debt sustainability and to exit the rescheduling cycle. It is a major step, but maintaining debt at sustainable levels over time is a more complex undertaking—which requires efforts both by debtors, on the one hand, and creditors and donors, on the other. For this, it is essential that debtors pursue sound economic policies, including good debt management. It is also essential that creditors/donors are ready to support HIPCs by providing adequate resources on appropriately concessional terms.

The Initiative is primarily concerned with achieving debt sustainability, but at the same time resources freed up by debt relief are to be channeled toward social expenditure and other poverty-reduction programs. In light of the latter and given that the countries targeted are among the poorest in the world, there has been ample discussion on the HIPC Initiative’s ability to make a substantial contribution to poverty reduction. It is important to keep the broader context in mind, namely that recent historical gross resource flows to HIPCs were three and a half times the level of debt service payments made. Thus in terms of these countries’ future resource needs in support of their poverty reduction strategies (PRSPs), the contribution of the HIPC Initiative is important, but much broader international support is needed. Experience has shown that external support can only be effective if it reinforces sound policies implemented by HIPCs themselves and leads to higher resources being directed to social development and poverty reduction. Debt relief and ODA are most important not in isolation, but as help for self-help.

The paper is organized as follows. The next section discusses debt relief initiatives for low-income countries and their impact in terms of debt-stock reduction. Section 3 examines the flow impact of debt relief, and discusses its significance in terms of resources flows to HIPCs. Section 4 comments on the debt sustainability outlook and more broadly on the HIPC Initiative’s contribution to, and the required international support for, poverty reduction.

II. DEBT RELIEF INITIATIVES FOR LOW-INCOME COUNTRIES—-DEBT STOCK PERSPECTIVE

A. Evolution of Debt Stocks

The overall debt level of low-income countries rose significantly in the 1980s and 1990s (Figure 1). For the group of 41 HIPCs, the level of debt tripled from under US$60 billion in 1980 to a peak of about US$190 billion in 1995, then declined somewhat to about US$170 billion by 1999. In contrast, the level of debt of all developing countries, and even of all low-income countries (LICs), continued to rise throughout the same period.2

Figure 1:
Figure 1:

Total Public External Debt in Selected Country Groups, 1981 - 1999 By Creditor; In billions of U.S. dollars

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Source: World Bank Global Development Finance, 2001.1/A group of 149 countries covered by the GDF. Of these, 137 report to the DRS, while World Bank estimates are used for the others.2/A group of 64 countries for which 1999 GNP per capita was no more than $755 as calculated by the World Bank. Of these, 62 report to the DRS.3/HIPCs which have reached the Decision Point under the Enhanced HIPC Initiative by July 2001.

The creditor composition of debt varies greatly: while private creditors have been the largest creditor group of all developing countries, their exposure to LICs, and even more so to HIPCs, increased slowly in the 1980s, but was stagnant for LICs in the 1990s and declined sharply for HIPCs, especially those 23 HIPCs that have pursued economic policies that allowed them to benefit from debt relief early on. At the same time, bilateral creditors remain the second largest creditor for all developing countries, and the largest creditor of LICs and HIPCs; as bilateral debt stocks have started to decline since the mid-1990—reflecting bilateral debt forgiveness as well as the beginning of stock-of-debt reduction packages from the Paris Club—multilateral creditors, whose exposure has risen steadily to all four country groups, have become the largest creditor group of the 23 decision point HIPCs.

Scaling debt stocks against exports or GNP also shows a large buildup of burdens in LICs and HIPCs from 1980 to the early l990s, and a modest decline since then (Figure 2). It also shows that the debt burdens of the HIPCs are much higher than, in fact a multiple of, the debt levels of LICs or all developing countries. Interestingly, the debt-to-GNP ratio of all developing countries has continuously risen from some 20 percent in 1981 to over 40 percent in 1999; LIC debt levels have risen slightly faster (possibly reflecting lower GNP growth), and stood at about 60 percent of GNP in 1999; this compares to a debt/GNP level of 110 percent for HIPCs.

Figure 2:
Figure 2:

External Debt in Selected Country Groups, in 1981 – 1999

(In percent of exports of goods and services, and gross national product)

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Source: World Bank Global Development Finance, 2001.1/HIPCs which have reached the Decision Point under the Enhanced HIPC Initiative by July 2001.2/A group of 64 countries for which 1999 GNP per capita was no more than $755 as calculated by the World Bank. Of these, 62 report to the DRS.3/A group of 149 countries covered by the GDF. Of these, 137 report to the DRS, while World Bank estimates are used for the others.

Relative to exports, debt burdens of all developing countries and LICs peaked in the mid-1980s, then stagnated or declined. The build-up continued in HIPCs until the mid-1990s, in part reflecting the unsuccessful export performance of HIPCs that has led to a decline in HIPCs’ share in world trade from 2.2 percent in 1970 to 0.7 percent in 1997.

The increase in LICs’ debt levels over time reflected both a willingness on the part of debtors to take on more debt, and on the part of creditors to take substantial lending risks in order to help poor countries, while in the case of official bilateral creditors promoting their own exports. It also reflected factors such as terms-of-trade shocks, a lack of sustained macroeconomic adjustment and structural reform, weak debt management practices, governance problems and other political factors, civil war and social strife.3

B. Evolution of Various Debt Reduction Mechanisms

Debt relief in the form of a restructuring or rescheduling of debt has been provided by creditors to debtors for a long time. The motivation is mainly to help the debtor over a period of payment difficulties, and to increase the creditor’s perceived likelihood of collecting on claims held. In cases where the debtor is a government, creditors have fewer tools available to enforce payments than in the case of non-sovereign debtors where foreclosure and bankruptcy are options. Also, where several players are involved, debtors and creditors have often found it convenient for both sides to reschedule debt in a concerted framework. The Paris Club has provided such a framework for sovereign debt reschedulings (of government-to-government debt) mainly with OECD creditor governments since the mid-1950s.4

Such Paris Club reschedulings involved mainly cash-flow relief until 1988. The debt servicing problems of middle-income countries, for example in Latin America in the 1980s, were seen as liquidity problems and were largely remedied by streching out payments to official bilateral creditors over time. Commercial creditors also provided cash-flow relief, but often in combination with a degree of debt reduction, e.g., through an exchange of claims for Brady bonds that provided some collateral. Table 2 shows that as of mid-2001 most middle-income countries have exited from the Paris Club rescheduling process.

Table 1:

Developing Country Classification, 2001

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Source: World bank Global Development finance (GDF), 2001.

A group of 149 countries covered by the GDF. Of these, 137 report to the World Bank Debtor Reporting System (DRS).

A group of 64 countries for which 1999 GNP per capita was no more than $755, as calculated by the World Bank. Of these, 62 report to the DRS.

A group of 85 countries covered by the GDF for which 1999 GNP per capita was between S756 and $9,265, as calculated by the World Bank. Seventy-five of these countries report to the DRS.

Classified by GDF as middle-income country.

Decision point reached under original HIPC framework. Case will be reassessed under the enhanced framework.

Country docs not report to the DRS.

Table 2.

Status of Paris Club Rescheduling Countries as of End-July 2001

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Sources: Paris Club secretariat; and Fund staff estimates.Note: 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, ** denotes rescheduling on Naples terms, *** denotes rescheduling on Lyon terms, and **** denotes rescheduling on Cologne terms.

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.

Rescheduling of arrears only.

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

Nonconcessional rescheduling at the authorities’ request.

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

Including deferral of maturities.

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

Former Socialist Federal Republic of Yugoslavia.

Last rescheduling on Toronto terms.

In contrast to middle-income countries, it became increasingly clear that the mounting debt burdens of low-income countries reflected deeper problems—they were solvency problems that required not only a temporary reduction in debt service, but also a reduction in the level of debt. Paris Club creditors began to grant such debt reduction in the form of concessional flow reschedulings5 for low-income countries in late 1988 under the so-called “Toronto Terms” that involved a debt reduction of about one-third of the eligible amounts.6 The level of debt forgiveness was subsequently raised in steps: to London terms in late 1991 (50 percent debt reduction), and to Naples terms (two-thirds debt reduction) at the end of 1994 (Tables 3-4). This resulted in increasingly longer and lower payment profiles on restructured debt (Figure 3).7

Figure 3.
Figure 3.

Evolution of Paris Club Low-Income Rescheduling Profiles1/

(In percent of amounts consolidated)

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Sources: Paris Club Secretariat; and IMF staff estimates.1/ Assuming a market interest rate of 8 percent. The payments profiles reflect the actual distribution of the debt reduction option (DR), debt service reduction option (DSR), the capitalization of moratorium interest option (CMI), or the long maturities option (LM).2/ Assuming equal principal repayments over 10 years including 5 years of grace.3/ Equal distribution among the options (DR, DSR, and LM).4/ Distribution (in percent) of DR 40; DSR 45; CMI 10; LM 5.5/ SO percent reduction in NPV terms provided in the context of the original HIPC initiative. Distribution (in percent) of DR 50; DSR 50.6/ 67 percent reduction in NPV terms. Distribution among options (in percent): DR 45; DSR 45; CMI 10. The LM option is not included, given that any creditor choosing this option undertakes best efforts to change to a concessional option at a later date when feasible.7/ 90 percent reduction in NPV terms provided in the context of the enhanced HIPC Initiative. DR option only.
Table 3.

Evolution of Paris Club Rescheduling Terms

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Sources: Paris Club.

Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years’ maturity and 2-3 years’ grace for middle-income countries; up to 18 years’ maturity for lower middle-income countries).

DR refers to the debt-reduction option; DRS to the debt-service-reduction option; CMI denotes the capitalization of moratorium interest; LM denotes the nonconcessional option providing longer maturities. Under London, Naples, Lyon and Cologne terms, there is a provision for a stock-of-debt operation, but no such operation took place under London terms.

These have also been called “Enhanced Toronto” and “Enhanced Concessions” terms.

Until November 1999 included an option of a 50 percent level of concessionality for countries with a per capita income of more than $500, and an overall net present value of debt/export ratio of less than 350 percent. For a 50 percent level of concessionality, terms were equal to London terms except for the debt-service-reduction option under a stock-of-debt operation that included a three-year grace period.

These terms are to be granted in the context of concerted action by all creditors under the HIPC

Initiative. They also include, on a voluntary basis, an ODA debt-reduction option.

Creditors agree on a case-by-case basis on a net present value debt reduction of 90 percent on pre-cutoff date commercial (non-ODA) debt, or more if this is required in the context of proportional burden sharing with other creditors to achieve debt sustainability in the debtor country. All creditors will seek to apply the DR option, but if that is not possible there is also a DSR option with very long maturities and grace periods.

Fourteen years before June 1992.

Interest rates are determined in the bilateral agreements implementing the Paris Club Agreed Minute. M = market rates; R= reduced rates.

The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.

Reduced to achieve a 50 percent net present value reduction.

Reduced to achieve a 67 percent net present value reduction; under the DSR option for the stock operation, the interest rate is slightly higher, reflecting the three-year grace period.

Reduced to achieve an 80 percent net present value reduction.

The reduction of net present value depends on the reduction in interest rates and therefore varies. See Footnote 9.

Table 4.

HIPCs: Paris Club Reschedulings By Type of Terms, 1976 - July 2001

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Sources: Paris Club Secretariat, and IMF staff estimates.

Bilateral creditors not participating in the Paris Club—mainly oil exporters in the Middle East, but also China, Taiwan Province of China and a number of other developing countries, including some HIPCs—provided more limited debt restructurings than other creditors, but in turn often saw their claims increasingly falling into arrears.

Paris Club reschedulings were complemented by initiatives to forgive bilateral ODA claims, going back as far as a resolution adopted in 1978 by the Trade Development Board (TDB) of the UN Conference on Trade and Development (UNCTAD). Also, donor governments gave some debt reduction through debt swaps,8 and began to provide more and more of bilateral development assistance in the form of grants.9

HIPCs have experienced a withdrawal of private creditors over the years. Similar to non-Paris Club official bilateral creditors, these claims are often not serviced. IDA facilitated buybacks of about US$7 billion in commercial debt of low-income countries at steep discounts with the help of grants from bilateral donors (Table 5).

Table 5.

IDA Debt Buybacks: Summary of Completed Operations for HIPCs, 1991 to 2001

(End-March 2001)

(In millions of U.S. dollars)

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Source: IDA.

Of original face value of principal.

Represent resources for IBRD, donors and contributions from certain recipient countries. These figures also include US$15 million for technical assistance grants and closing costs, and other related expenses.

Two tier operation. Commercial debt was bought back at 15 cents and suppliers credit at 8 cents.

16 cents for the cash buy-back and 20 cents for long terms exchange bonds.

The numbers relate only to the cash buy-back component of the total debt under the operation since the Facility financed exclusively the cash buy-back option, as approved by the Executive Directors (Report No. P-7151-IVC). Other resources for the operation included IDA credits, French concessional financing, IMF credits and co-financing from the government of Côte d’Ivoire.

Weighted average.

These “traditional debt relief mechanisms” reduced bilateral and commercial debt, but not debt to multilateral organizations. As multilateral institutions continued to provide support to low-income countries1 policy adjustment efforts through (mostly concessional) loans—in the absence of significant grant resources—they accounted for an increasing share of new loan resources to low-income countries, which was reflected in an increasing share of multilateral debt in the total debt of low-income countries. To mitigate this, a number of bilateral creditors began to provide grants to help service multilateral debts of some HIPCs, e.g., Uganda.

In the 1990s calls from various quarters, including NGOs, sought a broader approach to reducing the debt burden of low-income countries. These efforts culminated in the adoption of the HIPC Initiative in the fall of 1996 and its enhancement three years later in 1999 by the membership of the IMF and World Bank.10 At the same time as the implementation of the HIPC Initiative is moving ahead, a number of industrial countries have committed to go beyond it and forgive all or part of the remaining claims (Table 6).

Table 6.

Paris Club Creditors’ Delivery of Debt Relief Under Bilateral Initiatives Beyond the HIPC Initiative (August 1, 2001)

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Source: Paris Club Secretariat

Australia: (a) post-COD non-ODA relief to apply to debts incurred before a date to be finalized; (b) timing details for both flow and stock relief are to be finalized.

Canada: including Bangladesh. Canada has granted a moratorium of debt service as of January 2001 on all debt disbursed before end-March 1999 for 11 out of 17 HIPCs with debt service due to Canada. The debt will be written off at the completion point. The countries to be covered are: Benin, Bolivia, Cameroon, Ethiopia, Guyana, Honduras, Madagascar, Mali, Senegal, Tanzania, and Zambia.

100 percent of ODA claims have already been cancelled on HIPCs, with the exception of Myanmar’s debt to Canada.

France: cancellation of 100 percent of debt service on pre-cutoff date commercial claims as they fall due starting at the decision point. Once countries have reached their completion debt relief on ODA claims will go to a special account and will be used for specific development projects.

The Netherlands: (a) ODA: 100 percent ODA: pre- and post-cutoff date debt will be cancelled at decision point; (b) non-ODA: in some particular cases (Bolivia, Burkina Faso, Mali, Ethiopia, Nicaragua, and Tanzania), the Netherlands will write off 100 percent of the consolidated amounts on the flow at decision point; all other HIPCs will receive interim relief up to 90 percent reduction of the consolidated amounts. At completion point, all HIPC countries will receive 100 percent cancellation of the remaining stock of the pre-COD debt.

On debt assumed before December 31,1997.

United Kingdom: “beyond 100%”: full write-off of all debts of HIPCs as of their decision points, and reimbursement at the decision point of any debt service paid before the decision point.

United States: 100 percent post-COD non-ODA treated on debt assumed prior to 06/20/99 (the Cologne Summit).

Note: Columns (1) to (7) describe the additional debt relief provided following a specific methodology under bilateral initiatives and need to be read as a whole for each creditor. In column (1), “HIPCs” stands for eligible countries effectively qualifying for the HIPC process. A “100 percent” mention in the table means that the debt relief provided under the enhanced HIPC framework will be topped up to 100 percent through a bilateral initiative.

C. Relative Impact of Various Debt Reduction Mechanisms

What is the relative size of these various debt reduction mechanisms? Only rough estimates are available for the various elements of historical debt relief. As relief has been provided in a number of steps over time, comparing such estimates in present value terms at a given point in time necessarily involves large margins of uncertainty, but orders of magnitude still give a useful perspective.

Estimates of debt reduction in the context of the HIPC Initiative are based on existing debt stocks, i.e., after any debt reduction provided in the past. They then simulate the full use of traditional debt relief (stock-of-debt operation on Naples terms), and derive the further debt stock reduction that would be achieved by HIPC relief and additional bilateral debt forgiveness. For the 23 decision point HIPCs, total debt reduction is estimated at about two-thirds from existing debt stocks (Figure 4a).

Figure 4:
Figure 4:
Figure 4:

Reduction of Debt Stocks for HIPCs, as of July 2001

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Sources: HIPC Documents and Table 8.1/Traditional debt relief not yet provided as of decision point.2/Includes both traditional relief already provided in the past and yet to be provided in the context of the enhanced HIPC Initiative.
Table 7.

Summary of Debt Relief Under Traditional Mechanisms for 41 HIPCs

(In billions of end-1999 U.S. dollars)

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Sources: Agreed Minutes of Paris Club debt reschedulings; Paris Club Secretariat; World Bank Global Development Finance (GDF); and IMF staff estimates.

Based on Daseking and Powell, op. cit.

Table 8.

Tentative Estimates of Overall Debt Relief

(In billions of U.S. dollars)

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Sources: Table 4; HIPC country documents; Global Development Finance 2001; and IMF and World Bank staff estimates.

Data from HIPC documents (group 1) or GDF (group 2). Debt relief figures for group 2 are estimates. Data for Chad, and Ghana are in 2000 terms. Data for Benin, Bolivia, Cote d’lvoire, Mauritania, Mozambique, and Senegal and in 1998 terms. GDF data, which are for 1999, rely on country reporting and are not as comprehensive as the data used under the HlPC Initiative. Calculations of the NPV of debt in the GDF are based on a common (10 percent) discount rate, a methodology which differs from the currency-specific discount rates (or Commercial Interest Reference Rates) used in DSAs for the HIPC documents.

Refers to debt relief pledged by individual bilateral creditors over and beyond HIPC debt relief.

3/Includes Burundi, Central African Republic, Cote d’lvoire. Democratic Republic of Congo, Ethiopia, Ghana, Republic of Congo, Myanmar, Siena Leone and Togo.4/Includes Liberia, Somalia, and Sudan.

A more comprehensive perspective would also include the impact of debt reduction already provided in the past. Daseking and Powell11 derived estimates of the impact of traditional debt relief mechanisms based on Paris Club information, and World Bank data (GDF; see Table 7). Combining this with other estimates of the Paris Club Secretariat and of IMF and World Bank staff in the context of the HIPC Initiative (Table 8), yields an overall debt reduction by some 80 percent over time for the 37 countries that are expected to require HIPC relief (Figure 4b).12

Traditional debt relief already provided to the 37 HIPCs over the 1988-99 period has been estimated at about US$60-65 billion (in 1999 NPV terms). Additional traditional relief yet to be granted in the context of the HIPC Initiative (US$36 billion) would bring the total traditional relief to about US$100 billion. This compares with US$39 billion of HIPC debt relief, and US$9 billion expected from additional bilateral debt forgiveness.

The impact of the various debt relief initiatives varies among recipient countries depending on the structure and creditor composition of their debt. The debt reduction factors under the HIPC Initiative, for example, vary between less than 20 percent for Honduras and Senegal, and over 80 percent for Guinea-Bissau and São Tomé and Príncipe (Figure 5).

Figure 5.
Figure 5.

Enhanced HIPC Initiative Comparative Debt Reduction and Debt Relief for 23 Decision Point Countries

Status as of end july 2001

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Note: -- Debt reduction is measured by the common reduction factor. This refers to the percentage by which each creditor needs to reduce its debt stock at the decision point so as to enable the country to reach its debt sustainability target. The calculation is based in net present (NPV) information.-- For Bolivia, Burkina Faso, Guyana, Mali, Mozambique and Uganda assistance under the original and enhanced frameworks is combined.

Debt relief will leave HIPCs with debt levels comparable to those of other developing countries, and much lower debt service obligations. The existing debt stocks of the 23 decision point HIPCs after the delivery of committed debt relief are projected to be reduced by two-thirds. Compared to all non-HIPC developing countries, this is similar in terms of exports at under 130 percent, but these HIPCs’ debt levels will be much lower relative to GDP (29 of GDP for the 23 HIPCs against 36 percent of GNP for other developing countries; Table 9). At the same time, debt service obligations of these 23 HIPCs will fall to less than half the average of other developing countries, as discussed below.

Table 9.

Debt Indicators in Developing Countries and HIPCs, 1999 1/ 2/

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Sources: World Bank Global Development Finance; and HIPC documents.

Excludes Liberia and Somalia due to incomplete data.

Weighted averages; 1999 figures for the first 3 columns based on data Global Development Finance data.

Average for 1998–99 based on debt service paid.

Average for 2001–2003.

III. HIPC RELIEF IMPACT AND RESOURCE FLOWS TO HIPCS

Absolute debt service payments by developing countries and LICs rose by three and a half times during the 1980s and 1990s despite debt relief efforts (Figure 6). Debt service payments for all developing countries increased from about US$110 billion in 1981 to US$390 billion in 1999, and for LICs from US$14 billion to US$47 billion. Growth of debt service payments by HIPCs was less pronounced but still significant; for all 41 HIPCs, debt service paid was about US$6 billion in the early 80s and peaked at US$10 billion in 1995, reflecting an arrears clearance operation for Zambia, then stabilized at just under US$10 billion. Debt service payments by the group of 23 decision point HIPCs exhibited a similar evolution: they rose from around US$3 in 1981 to a (Zambia-induced) peak of US$6 billion in 1995, and then stablized at about US$3 ½ :. billion.

Figure 6:
Figure 6:

Total Debt Service Paid by Selected Country Groups; 1981 - 19991/

(In billion of U.S. dollars, and percent of exports of goods and services)

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Source: World Bank Global Development Finance of 2001.1/ Principal and interest payments on total long-terms debt (public and publicly guaranteed and private non-guaranteed), including IMF credit, and interest on short-term debt.2/A group of 149 countries covered by the GDF. Of these, 137 report to the DRS, while World Bank estimates are used for the others.3/A group of 64 countries for which 1999 GNP per capita was no more than $755 as calculated by the World Bank. Of these, 62 report to the DRS.4/HIPCs which have already reached the Decision Point under the Enhanced HIPC Initiative by July 2001.* Note: The peaks reflect arrears clearance operations in 1991 for Nicaragua with the IaDB and World Bank, and in 1995 for Zambia with the IMF. Net transfers to both countries were positive in these years.

As a proportion of export earnings, debt service payments for the various country groups averaged 15-25 percent in the early 80s, then rose to 25-30 percent by the mid-80s, before gradually getting back to 15-20 percent by the end of the 1990s. The ratio for HIPCs was higher than that for all developing countries until the mid-90s, when other developing countries experienced a sharp increase in the debt service ratio to over 20 percent, reflecting the increase in spreads paid by emerging market countries after the Asian crisis, and the loan support extended to overcome the crisis. Since the mid-1980s, the HIPCs’ ratio of debt service to exports was consistently below the ratio for LICs. The debt service ratio for the 23 decision point HIPCs was higher than that for other HIPCs or LICs, reflecting the fact that they generally serviced their debts—sometimes with the help of donor grants, e.g., for multilateral debt service—while several other HIPCs accummulated arrears and made only small debt service payments.

By the end of the 1990s, the group of 23 HIPCs had a total debt service ratio of slightly under 20 percent of exports, based on GDF data. The data reported in HIPC Initiative country documents show slightly lower actual debt service payments. This reflects in part the fact that debt service paid by private entities in HIPCs (without a HIPC government guarantee) is not included in the HIPC initiative calculations, and also the netting out of debt service grants against gross payments in the HIPC data, while GDF reports gross debt service paid. As recorded in the HIPC Initiative country documents, HIPC relief is projected to reduce the debt service ratio from 16 percent of export in 1998-99 to 8 percent 2001-05 (Tables 9-10 and Figure 7). Absolute debt service payments for these 23 countries averaged US$2.8 billion during 1998-99, and will be reduced by about one-third to an average of US$2 billion in 2001-05.13 Compared to payments that would be due during 2001-2005 in the absence of enhanced HIPC relief, the decline is about one-half. This holds in absolute terms as well as relative to exports, government revenue, or GDP (Table 10).

Figure 7:
Figure 7:

23 HIPCs: Debt Service and Social Spending after HIPC Relief, 1998 - 20051/

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Source: HIPC documents and staff estimates.1/ HIPCs which have reached their Decision Points by July 2001.
Table 10.

Impact of Debt Relief for the 23 HIPCs that Have Reached an Enhanced Decision Point 1/

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Sources: HIPC decision point documents; and IMF and World Dank staff estimates.

Impact shown for those 23 countries that have reached their enhanced decision points by July 2001. All ratios are weighted averages.

Assistance granted based on the NPV to exports target: Benin, Bolivia, Burkina Faso, Cameroon, Chad, The Gambia, Guinea, Guinea-Bissau, Madagascar, Malawi, Mali, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Tanzania, Uganda, and Zambia.

Fiscal window cases. Guyana, Honduras, Mauritania, and Senegal.

Debt service for 2000 is not included because many countries reached their enhanced decision point only in December 2000, or later. For Bolivia and Uganda the “Before HIPC Assistance” figures are after delivery of original HIPC relief.

HIPC relief is substantial relative to pre-HIPC debt service and—as we shall discuss in the next Section—provides a strong basis for debt sustainability. Yet its magnitude is modest when viewed in a broader context, e.g., compared to net external resource flows to these countries. Historical net resource flows to the public sector of the 23 HIPCs, including grants and technical cooperation, have been sizeable—they averaged US$5.9 billion annually during the 1980s (12.6 percent of GNP) and increased to US$8.8 billion (13.7 percent of GNP) during the 1990s (Figure 8). Annual savings from HIPC relief, in contrast, are estimated at about US$1 billion or l ½ percent of GDP for the period 2001-2005 compared to debt service payments in 1998-99 (Table 10). At the same time, spending on health and education is projected to rise by over 40 percent, or $1.7 billion per year (Figure 7) between 1999 and 2002; in terms of GDP, social spending is to rise from 5.5 percent of GDP to 7 percent. This exceeds health and education spending for low-income countries (of 4 ½ percent of GDP) and almost reaches middle-income country levels (7.3 percent of GNP) of 1997 (Table 11). However, as these countries’ social indicators suggest, it still falls short of needs.

Figure 8:
Figure 8:

Net Transfers on Public Medium- and Long-term Debt, 1981 - 19991/

(In billions of U.S. dollars and percent of recipient’s GNP)

Citation: IMF Working Papers 2001, 144; 10.5089/9781451856446.001.A001

Source: World Bank Global Development Finance of 2001.1/ Including grants and IMF.2/A group of 149 countries covered by the GDF. Of these, 137 report to the DRS, while World Bank estimates are used for the others.3/A group of 64 countries for which 1999 GNP per capita was no more than $755 as calculated by the World Bank. Of these, 62 report to the DRS.4/HIPCs which have already reached the Decision Point under the Enhanced HIPC Initiative by July 2001.
Table 11:

Public Expenditure on Health and Education

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Sources: World Bank World Development Indicators (WDI) database, and HIPC Initiative country documents.

1997 data for world, middle-income, and low-income countries, otherwise 1998 data.

In percent of Gross National Income, 1996 data.

Countries for which 1999 GNP per capita was higher than $9,265 as calculated by the World Bank.

A group of 85 countries for which 1999 GNP per capita was between $756 and $9,265 as calculated by the World Bank.

A group of 64 countries for which 1999 GNP per capita was no more than $755 as calculated by the World Bank.

HIPCs which have already reached their Decision Points under the Enhanced HIPC Initiative by July 2001.

Future resource requirements of HIPCs will remain high. The medium-term projections presented in the HIPC documents for the 23 decision point HIPCs showed net flows derived from balance of payments data; these data reflect grants more partially than the GDF data and generally do not include technical cooperation grants that are provided in kind, and are thus much lower than GDF data.14 Based on such balance of payments data, net flows amounted to US$4.3 billion in the 1990s, and are projected to increase to US$6.7 billion in the next 10 years; with GDP projected to rise, in relative terms net flows are projected to decline slightly from 6.7 percent of recipient GDP to 6.0 percent (Table 12). The grant element of the debt of these 23 HIPCs, which was less than 30 percent for debt outstanding at end-1999, is projected to increase substantially to more than 55 percent for new borrowing in the next decade (Table 12). Such increases in the supply of resources to HIPCs and the grant element involved will require a substantial effort on the part of creditors and donors.

Table 12.

HIPCs that Have Reached a Decision Point Flows of Official External Resources

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Sources: Calculations based on Decision Point documents, WEO database and staff estimates. Note: These figures are based on Balance of Payments statistics reporting by [he debtor countries.

Annual averages.

Official transfers.

Defined as new loans plus grants minus debt service paid.

1992-99.

2000-06.

1994-99.

1993-98.

Reflects clearance of arrears to the IMF in 1995. Excluding this operation, the ratios would be 8.2 and 8.4 percent for borrowing and debt service paid, respectively.

1990-98.

1998.

2000.

2001-2010.

After traditional relief.

Excludes Mali.

Note that progress toward raising aid levels would have a much higher impact on poverty reduction than additonal debt relief. Net ODA disbursements averaged 0.22 percent of donor GNP in 2000, with G-7 donors providing a much lower share of their income as aid than other OECD donors (Figure 9 and Table 13). Raising this by a mere 0.1 percent of GNP— rather than to the UN target of 0.7 percent—would provide an additional $24 billion to developing countries, dwarfing the annual impact that debt relief can have.

Figure 9: