Heavily Indebted Poor Countries (HIPC) Initiative--Status of Implementation
Author: International Monetary Fund
Publication Date:
20 Aug 2004
eISBN:
9781498330169
ISBN:
9781498330169
Language:
English
Keywords:
PP; HIPC Initiative; debt service indicator; Inter-American Development Bank; debt-service ratio; HIPC country document; HIPC debt relief; HIPC relief debt service; near-term debt-service payment; debt service figure; government revenue; IDA grant
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Heavily Indebted Poor Countries (HIPC) Initiative--Status of Implementation

Abstract

Heavily Indebted Poor Countries (HIPC) Initiative--Status of Implementation

I. Executive Summary

Progress in implementation. Since September 2003, six countries (Guyana, Nicaragua, Niger, Ethiopia, Senegal, and Ghana) have reached their completion points. As a result, fourteen countries, more than half of the 27 that have reached the decision point, have now qualified to receive irrevocably all debt relief committed under the enhanced HIPC Initiative.

Maintaining macroeconomic stability remains a challenge for the 13 countries that are in the interim period. Roughly half of these countries have experienced difficulties in policy implementation, particularly in the areas of public resource management and structural reform. Only three countries have yet to complete their full PRSPs.

Impact of HIPC relief. HIPC relief committed to the 27 countries that have reached their decision or completion points, together with other debt relief initiatives, represents a two- thirds reduction of the overall debt stock of these countries. Debt service-to-exports ratios have also been substantially reduced to an average of 10 percent. Savings from lower debt- service payments have contributed to a substantial increase in poverty-reducing expenditures.

Cost and creditor participation. The cost of providing debt relief under the HIPC Initiative to 37 HIPCs including Liberia, Somalia, and Sudan is estimated at US$54.5 billion in 2003 NPV terms. Over 20 non-Paris Club official bilateral and most commercial creditors have not indicated their intention to participate in the enhanced HIPC Initiative. Mobilizing the participation of these creditors requires persistent efforts by HIPCs.

Sunset clause. In light of Board discussions in July on a staff paper outlining the possible options, staffs propose that the sunset clause be extended by another two years to end-2006 to provide the opportunity for the remaining HIPCs to begin to establish a policy track record that would allow their consideration for HIPC relief.

Analysis for topping up. The case for topping up should continue to be considered on a case-by-case basis based on a strengthened analysis at the completion point, including on the impact of discount rate changes and unanticipated new borrowing, where relevant.

Debt situation in post-completion point countries. An update of debt stock and debt- service indicators in these countries indicates that, notwithstanding HIPCs’ high vulnerability to shocks, sound economic policies, and close monitoring using the framework of debt sustainability analysis for low-income countries would help prevent the re-emergence of unsustainable debt.

II. Introduction

1. This report reviews progress in the implementation of the enhanced HIPC Initiative since September 2003.1 It includes updates on the status of implementation in countries during their interim period, the status of creditor participation under the Initiative, and the estimated costs of the HIPC Initiative including Liberia, Somalia, and Sudan. The report suggests improvements to the analysis for the consideration of additional debt relief at the completion point (topping up) taking into account the experience so far and proposes an extension of the sunset clause based on discussions in the Boards of a joint staff paper outlining the possible options.2 Finally, the report provides an update of the external debt situation in post-completion point countries, emphasizing the importance of sound policies and close monitoring using the framework of debt sustainability analysis for low-income countries in preventing the re-emergence of unsustainable debt.

III. Implementation Update

A. Progress in Qualifying for HIPC Initiative Relief

2. Since September 2003, six countries (Guyana, Nicaragua, Niger, Ethiopia, Senegal, and Ghana) have reached their completion points, increasing the number of post-completion point HIPCs from eight to 14 as of end-July 2004 (Table 1). These countries are in the process of receiving all debt relief committed under the enhanced HIPC Initiative. Looking ahead, Madagascar could reach the completion point by the end of 2004.

Table 1.

HIPC Initiative: Committed Debt Relief and Outlook 1/ As of July 2004

(In millions of US dollars, in NPV terms in the year of the decision or completion point)

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Sources: HIPC country documents; and World Bank and IMF staff estimates.

Commited debt relief under the assumption of full participation of the creditors.

The assistance under the enhanced HIPC Initiative includes the topping up with the NPV calculated in the year of the completion point.

Côte d’Ivoire reached its decision point under the original-HIPC Initiative in 1998, but did not reach its completion point under the original-HIPC Initiative, nor did it reach its decision point under the enhanced-HIPC Initiative. The amounts of debt relief shown are only indicative, based on a preliminary document issued, and are not included in the totals.

3. Maintaining macroeconomic stability remains a challenge for countries that are in the interim period between their decision and completion points. Of the 13 countries in the interim period, six are on track with their macroeconomic programs. The Democratic Republic of Congo, Madagascar, Rwanda, and Sierra Leone have made continued progress in the implementation of their Fund- and IDA-supported programs. Having implemented corrective measures following the expiration of the earlier PRGF arrangements in 2002 and 2003, respectively, Honduras and Zambia have put in place economic adjustment programs supported by new PRGF arrangements. Of the remaining seven interim period countries, Cameroon, Chad, and Malawi have recently experienced difficulties in program implementation primarily in the fiscal policy area and are pursuing measures to bring their economic programs back on track (Table 2 and Annex III). Restoring macroeconomic stability in The Gambia, Guinea, Guinea-Bissau, and São Tomé and Príncipe will require strong efforts to address obstacles in public resource management and structural reforms. Creating a stable and favorable domestic environment remains a priority in Guinea-Bissau and São Tomé and Príncipe.3 Staffs of the Fund and IDA have continued to assist macroeconomic management and reform in these countries through the implementation of Fund Staff Monitored Programs (SMPs) and IDA-supported programs. Under their SMPs, Guinea has implemented a number of measures aiming at fiscal consolidation and The Gambia is strengthening its public expenditure management. Progress under the SMPs will pave the way for the resumption of PRGF-supported programs in these countries.

Table 2.

HIPCs in the Interim Period: Key Factors Affecting Policy Performance in Countries that Experience Delays in the Implementation of PRGF-Supported Programs

(As of end-July 2004)

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4. Most HIPCs in the interim period have prepared their PRSPs. As of end-June 2004, nine of the 13 HIPCs in the interim period had prepared a full PRSP and were making good progress in their implementation. São Tomé and Príncipe has already completed a full PRSP but has not submitted it to the IDA and Fund Boards pending further progress in macroeconomic stabilization and adjustment.

5. Serious institutional and capacity constraints are the main factors contributing to the delays in the three countries in the interim period that have not yet completed their full PRSPs. The Democratic Republic of Congo and Sierra Leone are experiencing the longest PRSP preparation times. Both countries were affected by conflict and suffer from weak administrative capacity and difficulties in engaging stakeholders in the broad participatory process needed for the development of a PRSP. The difficult political situation in Guinea-Bissau in 2002-03 has delayed the PRSP preparation process. With significant progress made in the first half of 2004, Sierra Leone and Guinea-Bissau are now expected to complete their PRSP by end-2004. The completion of PRSPs followed by implementation in the subsequent year should not impede progress in reaching the completion point, provided that performance under Fund- and IDA-supported programs remains satisfactory.

6. Moving forward with the remaining 11 countries that have not yet reached their decision points has been difficult. Nearly all these countries have been affected by conflict and several have large arrears to various creditors (Annexes II and III).4 These problems have complicated the design and implementation of viable policy adjustment and reform programs. Notwithstanding these difficulties, some are making good progress in establishing a track record of macroeconomic performance. A PRGF arrangement was approved for Burundi in early 2004, and discussions between the authorities and the Fund staff on a PRGF-supported program are underway in the Republic of Congo. The Fund also approved an Emergency Post-Conflict Assistance program for the Central African Republic in July 2004, which could lead to a PRGF-supported program in early 2005.

B. Impact of HIPC Initiative Relief

7. The HIPC Initiative relief committed so far to the 27 countries that have either reached their completion points or are in their interim period, together with other debt relief, represents a two-thirds reduction of the overall debt stock of these countries. In 2003 NPV terms, the outstanding debt stock of these countries would fall from about US$80 billion to US$26 billion after the delivery of traditional debt relief by bilateral creditors, assistance under the HIPC Initiative, and additional bilateral forgiveness (Figure 1).5 For the 14 countries that have reached their completion points, their debt stock has declined from US$37 billion to US$12 billion, or by about 67 percent in NPV terms.6 HIPC Initiative and associated debt relief is expected to lower the NPV of debt-to-exports ratio of the 27 countries to levels comparable to or lower than that of other non-HIPC low-income countries and developing countries in general (Annex IV).

Figure 1.
Figure 1.

Debt Stock Reduction

(In billions of U.S. dollars in 2003 NPV terms)

Citation: Policy Papers 2004, 031; 10.5089/9781498330169.007.A001

Source: HIPC Initiative country documents; and World Bank and IMF staff estimates.

8. The HIPC Initiative continues to provide substantial savings in terms of debt- service payments for HIPCs. Interim assistance from key creditors starts flowing to HIPCs once they have reached the decision point, lowering their near-term debt-service payments. Compared with the 1998-99 averages, debt-service payments relative to exports and fiscal revenue in the 27 countries that have reached their decision or completion points have declined from an average of about 16 percent and 24 percent to 10 percent and 15 percent in 2003, respectively. These ratios are projected to decline further to less than half of the 1998-99 average by 2006 (Figure 2 and Appendix Tables 1A and 1B).7 The debt-service ratios of these countries in the near term are below the average in non-HIPC low-income countries.

Figure 2.
Figure 2.

Debt-Service Ratios for the 27 Countries that have Reached Decision or Completion Points

(Weighted average, in percent)

Citation: Policy Papers 2004, 031; 10.5089/9781498330169.007.A001

Source: HIPC documents and Fund staff estimates.
Table 1A.

Summary Debt Service for 27 Decision Point HIPCs

(In millions of US dollars, unless otherwise indicated)

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Sources: HIPC country documents; and World Bank and IMF staff estimates.

The debt service figures for 2000 largely reflect pre-HIPC relief debt service because many countries did not reach the decision point until late in 2000 or later. Thus, the full impact of relief f will not be felt until 2001 and thereafter. See Table 5 for a detailed breakdown.

Weighted averages.

Table 1B.

Debt Service for Individual HIPCs that Reached Decision Points, by Country, 1999-2006

(In millions of US dollars, unless otherwise indicated)

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Sources: HIPC country documents; and IMF staff estimates.

Debt service due after the full use of traditional debt relief mechanism and assistance under the enhanced HIPC initiative. For Bolivia and Mozambique, these figures are also after additional bilateral assistance beyond HIPC.

Debt service is higher than anticipated at the decision point due to higher new borrowing than previously projected.

On fiscal year basis, i.e. 2000 column shows FY 1999/2000.

The debt service figures for 2000 largely reflect pre-HIPC relief debt service because these countries did not reach their decision point until late in 2000 or later. Thus, the full impact of relief for did not take effect until 2001 and thereafter.

Debt service is lower than anticipated at the decision point due to lower financing needs than previously projected.

Debt service in 2002 is higher than anticipated at the decision point because the completion point has been delayed.

Honduras received less interim relief in 2001 than anticipated at the decision point.

The relief for Madagascar is indicative and subject to change. The Madagasy authorities and Paris Club creditors would need to revisit the outstanding bilateral debt numbers. Also, minor adjustments need to be incorporated in the case of three multilateral creditors. Consequently, the IMF Board approved US$790 million in HIPC relief with the the understanding that Madagascar's exact level of HIPC assistance will be determined once such revisions are made.

Debt service figures differ from those in the decision point document due to exchange rate changes.

Debt service due in 2002/03 reflects a hypothetical assumption that arrears to non-Paris Club creditors (about US$2 billion) would be regularized and serviced. It also reflects the resumption of payments to the Paris Club creditors that had provided a total deferral of debt service in the wake of Hurricane Mitch in 1998, and upfront payments associated with debt rescheduling agreements.

Debt service reflects some payments to commercial creditors and payments on moratorium interest not reflected in the completion point document.

9. Debt relief under the HIPC Initiative has helped countries to increase poverty- reducing expenditures, which on average have risen from 6.4 percent of GDP in 1999 to 7.9 percent of GDP in 2003, a level about three times that spent on debt service (Figure 3).8 Poverty-reducing expenditures are expected to increase in all countries that are making steady progress in implementing their PRSPs and are on track with their economic reform programs, with financing from increased domestic revenue and international assistance in the form of new aid flows and debt relief (Appendix Tables 1A, 2A, and 2B).9

Figure 3.
Figure 3.

Poverty-Reducing Expenditures and External Debt Service in 27 Countries that have Reached Decision or Completion Points

(Weighted average, in percent of GDP)

Citation: Policy Papers 2004, 031; 10.5089/9781498330169.007.A001

Source: HIPC documents and Fund staff estimates.
Table 2A.

Poverty Reducing Expenditure by the 27 Countries that Reached Decision Points

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Sources: HIPC country documents; and IMF staff estimates.

Data is not available for all countries, for all years. To aggregate, the last available data were used for future years, thus understating the likely level of social spending. Furthermore, the coverage of poverty reducing expenditure varies across countries, but is generally consistent with the definition in the PRSP and the budget. In some countries, the definition of poverty reducing expenditures has evolved over time to include more sectors; therefore, some of the increase in such spending over the 1999-2003 period may reflect changes in the definition.

Weighted averages.

Table 2B.

Poverty Reducing Expenditure for Individual HIPCs that Reached Decision Points, by Country 1/

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Sources: HIPC country documents; and IMF staff estimates.

The coverage of poverty reducing expenditure varies across countries, but is generally consistent with the definition in the PRSP and the budget. In some countries, the definition of poverty reducing expenditures has evolved over time to include more sectors; therefore, some of the increase in such spending over the 1999-2003 period may reflect changes in the definition.

Data refer to health and education spending

Refers to poverty related spending by the public sector. Includes spending on health, education, basic sanitation, and selected urban and rural development, both current and capital. Excludes education spending at the university level, pension contributions, and health and education spending by the Ministry of Defense

Spending on health, education, roads, youth and employment, promotion of women, agriculture, environment and justice

Spending on health, education, rural development, infrastructure, and good governance.

Spending on health, education, reintegration of demobilized soldiers, forestry and agriculture, water and sanitation, infrastructure and rural development, and community facilities; for 2005-2006, amount estimated based on HIPC assistance projected.

Spending on health, education, rural infrastructure

Spending on education, health and agriculture

From 2001 onward, reflects GPRS definition of poverty expenditure by Federal government, including primary healthcare, basic education, agriculture, rural water, feeder roads, and rural electricity (and total education and health spending before 2001).

Spending on justice, agriculture, fisheries and acquaculture, public works, urbanization, health, social affairs, primary education, professional and technical education.

Spending on health, education, housing, water, and severances

Spending on education, health, water and sanitation, rural infrastructure, and social safety projects.

Spending on health, education and water

Spending on education, health, social security, welfare, housing, community and social development, publishing and broadcasting services.

Spending on education, health, and social safety nets

Spending on education, health, and poverty reduction programs

Spending on health, education, infrastructure, agriculture, governance, and macroeconomic management.

Education, health, rural infrastructure and food assistance

Spending on internal affairs, agriculture, commerce, education, youth and sports, health, transport and communication, energy and water resources, gender, public service, lands and resettlement, and support to local government.

Health, education and promotion of women

Spending on health, education, social welfare, and some economic services and security-related services

Spending on education, health, water, agricultural research and extension, lands, roads, and the judiciary

Spending on health, education, Poverty Action Fund, some donor funded and administered projects

Coverage extended since 2001: health, education, housing, welfare, information services, and general social services

Level of government includes central, local, and public enterprises

Level of government includes central and local

For countries without projections, the last available data are used in the aggregate total for future years, thus understating the likely level of social spending.