Initiative for Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) - Status of Implementation

This report reviews progress and issues in implementing the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and reports on the implementation of the Multilateral Debt Relief Initiative (MDRI) by IDA, the IMF, and AfDF. It concludes that the volume of debt relief has increased significantly since the inception of the HIPC Initiative in 1996, thereby reducing HIPCs’ debt service burdens and allowing them to finance increased poverty reduction efforts. It also provides updated information on the costs of debt relief under the HIPC Initiative and the MDRI. Finally, it reviews the status of creditor participation and delivery of debt relief under the two initiatives, highlighting the challenges to increase the participation by non–Paris Club official bilateral and commercial creditors in the HIPC Initiative.

Abstract

This report reviews progress and issues in implementing the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and reports on the implementation of the Multilateral Debt Relief Initiative (MDRI) by IDA, the IMF, and AfDF. It concludes that the volume of debt relief has increased significantly since the inception of the HIPC Initiative in 1996, thereby reducing HIPCs’ debt service burdens and allowing them to finance increased poverty reduction efforts. It also provides updated information on the costs of debt relief under the HIPC Initiative and the MDRI. Finally, it reviews the status of creditor participation and delivery of debt relief under the two initiatives, highlighting the challenges to increase the participation by non–Paris Club official bilateral and commercial creditors in the HIPC Initiative.

I. Introduction

1. This report reviews the implementation of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative since the August 2005 Status of Implementation report and presents information on the implementation of the Multilateral Debt Relief Initiative (MDRI) by the International Development Association (IDA), the International Monetary Fund (IMF), and the African Development Fund (AfDF).1 Section II provides an overview of their implementation during the past decade, including a brief summary of the two initiatives, an overview of the progress of countries in qualifying for debt relief, and an analysis of the impact of the HIPC Initiative and the MDRI on HIPCs’ debt stocks, debt service, and poverty-reducing expenditures. Section III updates the information on estimated costs and delivery of HIPC Initiative and MDRI debt relief and reports on the status of creditor participation, with an emphasis on participation by non-Paris Club official bilateral and commercial creditors.

II. Review of Implementation

A. Brief Summary of the HIPC Initiative and the MDRI

2. September 2006 marks the tenth anniversary of the HIPC Initiative. The Initiative was established in 1996, after almost two decades of repeated debt rescheduling provided to low-income countries by members of the international community. Unlike traditional debt-reduction mechanisms, the Initiative involved, for the first time, debt relief from multilateral financial institutions. Its objective was to reduce eligible countries’ debt burdens to the thresholds established under the Initiative, subject to satisfactory policy performance. The countries targeted under the Initiative were the poorest, most heavily indebted members of IDA and the IMF that pursued or adopted programs of adjustment and reform supported by the two institutions. These countries could benefit from the Initiative upon showing, through a track record, an ability to put to good use the resources freed by debt relief. To date, the HIPC Initiative remains the only internationally agreed framework for providing comprehensive debt relief to low-income countries, although creditor participation continues to be voluntary.

3. The HIPC Initiative was enhanced in September 1999 to provide broader, deeper, and faster debt relief. The enhancement was the result of a comprehensive review of the Initiative by IDA and the IMF and of public consultations, which emphasized the need to deepen and accelerate the implementation of the Initiative. In this context, the Initiative’s debt-burden thresholds were adjusted downward, thus enabling a larger group of countries to qualify for more debt relief. A number of creditors, including multilateral institutions, also started to provide early assistance to qualifying countries in the form of interim relief. Moreover, “floating completion points” were introduced, which were contingent on an outcome-based assessment of country performance rather than a fixed track record. These aimed to provide incentives to implement reforms quickly, speed up the delivery of debt relief, and develop country ownership of reforms.

4. The links between debt relief and poverty-reduction efforts were strengthened at the same time. The international community agreed that debt relief needed to be part of a comprehensive poverty reduction strategy focused on strengthened institutional capacity, higher growth, and better targeted social programs. Debt relief was henceforth linked to progress in preparing and implementing Poverty Reduction Strategies (PRSs), which were designed to be country driven and developed with the broad participation of civil society.

5. The MDRI was launched in 2005 to reduce further the debts of HIPCs and provide additional resources to help them meet the Millennium Development Goals. Proposed by the G8 countries, the MDRI is separate from the HIPC Initiative but linked to it operationally. Under the MDRI, three multilateral institutions—the IDA, IMF and AfDF—provide

100 percent debt relief on eligible debts to countries having completed the HIPC Initiative process.2 While the MDRI is an initiative common to three institutions, their implementation modalities vary (Table 1). Debt relief under the MDRI is to be provided by the three institutions once a country reaches the HIPC completion point. A key aspect of the MDRI is its compensatory financing for IDA and the AfDF. Moreover, annual allocations from IDA and AfDF to countries receiving MDRI debt relief will be reduced by the amount of MDRI debt service relief in that year. Unlike the HIPC Initiative, the MDRI is not comprehensive in its creditor coverage and does not involve participation by official bilateral or commercial creditors, or of multilateral institutions other than the above-mentioned three.

Table 1.

Main Characteristics of the HIPC Initiative and the MDRI

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1

In addition, non-HIPCs with per capita income below US$380 also qualify for MDRI debt relief from the IMF.

2

In exceptional cases, a country may also receive additional HIPC Initiative debt relief at the completion point (topping up).

Table 4.

HIPC Initiative and MDRI: Committed Debt Relief and Outlook 1/ Status as of mid-July 2006

(In millions of U.S. dollars, in end-2005 NPV terms, unless otherwise indicated)

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Sources: HIPC documents; and World Bank and IMF staff estimates.
1/

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

2/

The total amounts shown are only indicative, as they represent the sum of individual commitments expressed in different NPV terms, corresponding to the time of the decision point of each HIPC.

3/

Also reached completion point under the original HIPC Initiative. The assistance includes original debt relief.

4/

Assistance includes topping up at the completion point.

5/

These are countries that meet the HIPC Initiative income and indebtedness criteria using end-2004 data and that may wish to be considered for HIPC Initiative assistance.

6/

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 has it reached the decision point under the enhanced HIPC Initiative.

7/

Topping-up assistance and assistance provided under the original HIPC Initiative are expressed in NPV-terms as of the time of the enhanced HIPC Decision Point.

8/

MDRI assistance has been delivered in full to the post-completion-point countries by IDA and the IMF. AfDF is expected to deliver the assistance retroactively as of January 1, 2006. MDRI Assistance from the IMF presented in this table does not include assistance to two non-HIPCs.

B. Country Progress in Qualifying for Debt Relief Under the Enhanced HIPC Initiative and MDRI

6. The past decade has witnessed significant progress in the implementation of the HIPC Initiative. Progress under the original HIPC Initiative was relatively slow, with only six countries reaching the decision point and four the completion point between 1996 and end-1999. After the enhancement of the Initiative, however, 22 countries reached their decision points in 2000, and all but five of those have already reached their completion points.3 Since 2000, one to two countries per year have reached their decision points, and three countries per year have, on average, reached their completion points (Figure 1).

Figure 1.
Figure 1.

Number of Countries Reaching Enhanced HIPC Initiative Decision or Completion Point by Year

Citation: Policy Papers 2006, 048; 10.5089/9781498332293.007.A001

Source: HIPC Completion Point Documents.Note : 2000 data for enhanced decision point countries not to scale.

7. To date, HIPCs have spent 2.9 years on average between decision and completion points under the enhanced HIPC Initiative (Figure 2).4 Interim periods have been lengthening over time from 0.2 years in early 2000 (Uganda) to 5.5 years in 2006 (Cameroon).5 Interim periods may increase further, with countries such as Malawi, Sâo Tomé and Príncipe, Guinea, Guinea-Bissau, and the Gambia expected to take even longer to reach their completion points. This is partly due to the fact that better-performing countries were the first to qualify.

Figure 2.
Figure 2.

Length of Interim Periods of Post-Completion-Point HIPCs

Citation: Policy Papers 2006, 048; 10.5089/9781498332293.007.A001

Source: HIPC Completion Point DocumentsNote: The average length of the interim period for a given year is calculated as the average interim period of countries reaching the HIPC completion point in that year.

8. Helping countries move through the HIPC Initiative process has become increasingly challenging for a number of reasons. Some HIPCs experienced extended interruptions to PRGF-supported program implementation, mainly due to fiscal policy slippages (most commonly primary expenditure overruns). Weak budget execution and poor policy implementation have often slowed the achievement of agreed triggers. Preparing fully participatory PRSPs has taken longer than expected, given that many countries lack the institutional and human resource capacity needed to prepare such documents. Finally, progress in several pre-decision-point countries has been hindered by internal conflict, governance issues, or protracted arrears.

9. As of mid-August 2006, 19 countries, representing almost half of the 40 identified HIPCs, reached their completion points under the HIPC Initiative (Table 2 and Annex IV).6 Most recently, Cameroon reached its completion point in April 2006. All 19 countries have received or are receiving irrevocably the HIPC Initiative debt relief committed at the decision point. They have also received debt-stock reductions under the MDRI from IDA and the IMF and are expected to receive MDRI debt relief from the AfDF soon.7

Table 2.

List of Countries That Have Qualified for, are Eligible or Potentially Eligible and May Wish to Receive HIPC Initiative Assistance (as of end-July 2006)

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10. Five out of the 10 countries between the decision and completion point (interim HIPCs) are advancing with the implementation of their macroeconomic programs

(Annex III). Three countries (Malawi, Sâo Tomé and Príncipe, and Sierra Leone) have been satisfactorily implementing their macroeconomic policy programs, finalized their PRSPs, and made substantial progress in fulfilling the completion point triggers. They could reach their completion points by end-2006. Two countries, Burundi and the Republic of Congo, reached their decision points only recently.

11. The other five interim HIPCs have been experiencing difficulties in the implementation of their macroeconomic programs. Staffs have continued to assist Chad, the Democratic Republic of the Congo, the Gambia, Guinea, and Guinea-Bissau in addressing obstacles in macroeconomic and structural reforms, particularly in public resource management. During the first quarter of 2006, IDA suspended project disbursements to Chad due to the dispute over changes to the framework for the management of revenues from the Chad-Cameroon pipeline. During this period, IDA did not suspend the disbursement of interim debt relief to Chad. IDA has now resumed full disbursement of project assistance to Chad after a comprehensive agreement was reached in July on a new framework for pipeline revenues. A supplementary budget for 2006 has recently been agreed with the IMF and IDA, which could pave the way for the restoration of macroeconomic stability. The Democratic Republic of the Congo is pursuing corrective measures in the area of fiscal policy that could lead to a new FMF-supported program. The Gambia, Guinea, and Guinea-Bissau experienced interruptions in the implementation of their macroeconomic programs and have resorted to staff-monitored programs with the IMF. They expect to resume their engagement in IMF-supported programs, although risks remain, in particular with respect to rising political tensions in the first two, and internal and external imbalances in the latter.

12. With regard to the completion of a full Poverty Reduction Strategy Paper (PRSP), six interim countries have already done so, and the other four are expected to follow suit by end-2006. In addition to Malawi, Sâo Tomé and Príncipe, and Sierra Leone, three other countries (Chad, the Gambia, and Guinea) have adopted a full poverty reduction strategy (PRS) and begun its implementation, although more progress is needed to establish a one-year satisfactory track record and Chad’s PRSP is being updated. The Democratic Republic of the Congo has recently completed a full PRSP. The other countries (Burundi, Guinea-Bissau, and the Republic of Congo) are expected to complete their full PRSPs by end-2006. The Republic of Congo has recently reached its decision point and is proceeding with the preparation of its PRSP at a satisfactory pace. However, the preparation of the PRSP in Burundi was delayed by security tensions and political instability and capacity constraints in Guinea-Bissau have hindered the preparation of the full PRSP.

13. Eleven countries, which have been assessed to meet the HIPC Initiative’s income and indebtedness criteria based on end-2004 data and might wish to avail themselves of the Initiative, have not yet reached their decision points.8 In April 2006, the Boards endorsed and closed the list of countries which meet the Initiative’s income and indebtedness criteria based on end-2004 data, but recognized that the list could be amended to include countries whose data are later verified to meet the two criteria. This list includes seven countries that had been identified as HIPCs in previous HIPC Initiative reports (Central African Republic, Comoros, Côte d’Ívoire, Liberia, Somalia, Sudan, and Togo), four new countries (Eritrea, Haiti, the Kyrgyz Republic, and Nepal), and three additional countries which met the two criteria but indicated that they did not wish to avail themselves of the HIPC Initiative (and therefore will not be covered in this report).9 The 11 countries which might wish to avail themselves of the HIPC Initiative will be henceforth referred to in this report as pre-decision point HIPCs.

14. Three of the 11 pre-decision-point HIPCs currently satisfy all eligibility criteria under the Initiative and are making progress toward reaching their decision points

(Annex II). Haiti’s continued performance supported by IMF Emergency-Post-Conflict Assistance (EPCA) since October 2005 is expected to lead to an IMF-supported program in the coming months. A first draft of the Interim-PRSP (I-PRSP) has also been completed. The Kyrgyz Republic is making progress with the implementation of its IMF-supported program and has completed a full PRSP. Both countries are expected to reach the HIPC Initiative decision point by end-2006. Satisfactory performance under the current EPCA-supported program together with external arrears clearance, is expected eventually to pave the way for an IMF-supported program in the Central African Republic, which has also resumed the preparation of its PRSP.

15. Three other countries currently satisfy all eligibility criteria under the Initiative, but need to step up efforts to reach the decision point.10 Nepal has been engaged in an IMF-supported program, but policy implementation has weakened recently. It has also completed a full PRSP. The authorities are still considering whether to avail themselves of the HIPC Initiative. Côte d’Ívoire reached its decision point under the original HIPC Initiative in 1998, but the security and political situation deteriorated soon afterward. Significant progress toward peace was made in 2006, which, together with performance under an EPCA-supported program in 2006, could help pave the way for an IMF-supported program in 2007. Togo has not had an IMF-supported arrangement since 1998, but the authorities intend to take the necessary steps that could lead to a possible IMF-supported program. Both Côte d’Ivoire and Togo have yet to complete their full PRSPs.

16. The remaining five countries are not yet eligible for the HIPC Initiative. Comoros, Eritrea, Liberia, Somalia, and Sudan have not started an IDA- and IMF-supported program of economic reform after October 1996 and thus do not meet the policy eligibility criterion under the Initiative. Of these, Comoros, Liberia, Somalia, and Sudan have protracted arrears to various creditors, and a concerted international effort will be required for arrears clearance. Some progress in this area has been made in the cases of Comoros, Liberia and Sudan, which could eventually pave the way for IDA- and IMF- supported programs. The Eritrean authorities have also expressed interest in taking the necessary steps that would lead to an IMF-supported program. An I-PRSP has been completed by Comoros, while Liberia, Sudan, and Eritrea are in the process of finalizing their I-PRSPs. The situation in Somalia remains fragile, and engagement in IDA- and IMF- supported programs, as well as preparation of the PRSP, are unlikely in the near future.

17. The sunset clause of the HIPC Initiative is set to take effect at end-2006, which could leave the countries that have not yet fulfilled all eligibility criteria with debt burdens above the Initiative’s thresholds. Under the current extension of the HIPC Initiative’s sunset clause, countries need to start to implement a qualifying IMF- and IDA-supported program of adjustment and reform by end-2006 to become eligible for HIPC Initiative debt relief. If they do not start such a program by this date, the five (and possibly more) countries may not be able to benefit from debt relief under the HIPC Initiative and eventually the MDRI.11 The IDA and IMF Boards are expected to discuss in September 2006 options to deal with the countries that are not likely to meet the policy eligibility criterion by the time the sunset clause takes effect at end-2006.12

C. Impact of HIPC Initiative and MDRI Debt Relief on Debt Stocks, Debt Service, and Poverty-Reducing Expenditures

18. Debt relief under the HIPC Initiative and the MDRI is expected to reduce the debt stocks of the 29 post-decision-point HIPCs by about 90 percent (Figure 3). Traditional debt relief and HIPC Initiative assistance are projected to reduce the total pre-decision-point debt stock of these countries to US$37 billion from about US$88 billion, in end-2005 NPV terms. Voluntary additional bilateral debt relief and assistance under the MDRI are expected to further lower debt stocks to US$10 billion. Debt stocks in the 19 post-completion-point countries are expected to decline by an average of 55 percent, from a total of US$69 billion to US$31 billion (in end-2005 NPV terms), due to traditional and HIPC Initiative debt relief. After additional bilateral and MDRI debt relief, their debt stock is expected to decline to US$8 billion.13

Figure 3.
Figure 3.

NPV of Debt After HIPC Initiative, Additional Bilateral Debt Relief and MDRI

(In billions of US dollars; end-2005 terms)

Citation: Policy Papers 2006, 048; 10.5089/9781498332293.007.A001

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

19. The debt service of the 29 post-decision-point HIPCs has been reduced significantly as a result of HIPC Initiative debt relief (Figure 4 and Appendix Tables 1 and 2). Debt-service-to-exports ratios of the 29 HIPCs that have reached their decision points have declined from about 14 percent one year prior to the decision point to about 6 percent five years after the decision point. In cumulative terms, these countries’ total debt service has been reduced by about US$600 million over six years, as a result of interim and debt relief after the completion point.14 However, analysis based on nine post-completion-point countries suggests that the NPV of debt-to-exports ratios at completion point was on average almost 40 percentage points higher than projected at decision point, mainly on account of exogenous changes in discount and exchange rates rather than new borrowing (see Box 1).

Figure 4.
Figure 4.

Debt Service for the 29 Post-Decision-Point HIPCs

(In millions of U.S. dollars (left scale) and percent of exports (right scale))

Citation: Policy Papers 2006, 048; 10.5089/9781498332293.007.A001

Sources: HIPC documents; and Fund staff estimates.Note: For countries that reached decision point after 2000, current projections of debt service due is used for latest years.1/ Corresponds to years 2001 for Ethiopia and Chad; 2002 for Ghana and Sierra Leone; 2003 for Democratic Republic of the Congo; 2005 for Burundi; 2006 for Republic of Congo; and 2000 for rest of HIPCs.
Table 1.

Summary of Debt Service and Poverty Reducing Expenditures 1/

(In millions of US dollars, unless otherwise indicated)

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Sources: HIPC country documents; and World Bank and IMF staff estimates.Note: Debt service figures for 1998 and 1999 reflect debt relief already provided to Bolivia, Guyana, Mozambique and Uganda under the original HIPC Initiative.
1/

Data refers to 29 post-decision point countries, unless specified otherwise.

2/

Excluding Burundi, the Democratic Republic of the Congo, and the Republic of Congo, for which data for early years are not available.

3/

The debt service figures for 2000 largely reflect pre-HIPC Initiative relief debt service because many countries did not reach their decision points until late in 2000 or thereafter. Debt service paid covers 1998-2005, and debt service due covers 2006-2009. For post-completion point HIPCs, debt service due assumes full HIPC Initiative debt relief, and additional debt relief provided by some Paris Club Creditors on a voluntary basis. For pre-completion point countries, debt service due includes interim debt relief and full HIPC Initiative assistance expected at the projected completion point. See Table 2 for a detailed breakdown.

4/

For projections, debt service due after MDRI is used for countries that reached the completion point, and debt service due after HIPC Initiative assistance is used for countries that have not reached the completion point.

Table 2.

Debt Service of the 29 HIPCs that Have Reached the Decision Point, by Country, 1998-2009

(In millions of US dollars, unless otherwise indicated)

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Sources: HIPC country documents; and World Bank and IMF staff estimates.Note: Data corresponding to years of decision and completion points are in thin and thick boxes, respectively.
1/

Debt service due after the full use of traditional debt relief mechanism and assistance under the enhanced HIPC Initiative. For the completion-point countries, debt relief includes bilateral assistance beyond HIPC relief provided by some bilateral creditors on a voluntary basis.

2/

The projected ratio is calculated after MDRI and additional bilateral debt relief.

3/

The projected ratio is calculated after HIPC Initiative and additional bilateral debt relief.