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

This report provides an update on the status of implementation, impact and costs of the enhanced Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) since mid-2006. It also discusses the status of creditor participation in both initiatives and the issue of litigation of commercial creditors against HIPCs.

Abstract

This report provides an update on the status of implementation, impact and costs of the enhanced Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) since mid-2006. It also discusses the status of creditor participation in both initiatives and the issue of litigation of commercial creditors against HIPCs.

I. Introduction 1

1. This report reviews the implementation of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) since the 2006 Status of Implementation Report.2 Section II provides an overview of progress under both initiatives during the last year, and an analysis of the impact of debt relief on debt service, poverty-reducing expenditures, debt stocks, and debt sustainability of HIPCs. 3 Section III updates the information on estimated costs and delivery of HIPC Initiative and MDRI debt relief; it also reports on the status of creditor participation, with an emphasis on participation by commercial creditors. Section IV concludes with issues for discussion.

2. The key findings of this report are as follows:

  • There has been progress in implementing the HIPC Initiative and the MDRI. Three countries have reached the HIPC Initiative’s completion point, and two others have reached decision point.

  • Lower debt burdens and debt-service payments have been associated with increased poverty-reducing expenditures.

  • Most multilateral financial institutions and Paris Club creditors have continued to provide debt relief in line with their commitments under the HIPC Initiative and the MDRI. The delivery of debt relief by non-Paris Club and commercial creditors, while improving, remains low, and full participation of these creditors needs to be encouraged.

  • Litigation by commercial creditors against HIPCs presents a growing challenge to the implementation of the HIPC Initiative.

II. Review of the Implementation and Impact of the HIPC Initiative and the MDRI

A. Implementation of the HIPC Initiative and the MDRI Recent Developments

3. The main developments in the implementation of the HIPC Initiative since the publication of the last Implementation Report in August 2006 are as follows:

  • The sunset clause took effect on December 31, 2006. 4 The Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF), however, have decided to grandfather all countries that met the income and indebtedness eligibility criteria based on end-2004 data, including countries that might be assessed in the future to have met these criteria.5 As a result, countries that did not meet the policy performance eligibility criterion of the HIPC Initiative by the end-2006 sunset clause date may nonetheless become eligible for HIPC Initiative assistance if they adopt, at any time, a qualifying IMF- and IDA-supported program.

  • In April 2007, following an agreement on the amount of its liabilities to the Russian Federation, Afghanistan was found to meet the income and indebtedness criteria based on end-2004 data, and was therefore added to the list of countries potentially eligible for assistance under the HIPC Initiative (the ring-fenced list), bringing the total number of HIPCs to 41 (Table 1).

    Table 1.

    List of Heavily Indebted Poor Countries

    (as of end-July 2007)

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    Countries that have qualified for irrevocable debt relief under the HIPC Initiative and have received MDRI relief.

    Countries that have qualified for assistance under the HIPC Initiative (i.e. reached decision point), but have not yet reached completion point.

    Countries that are potentially eligible and may wish to avail themselves of the HIPC Initiative.

    Based on end-2004 data, the Kyrgyz Republic is potentially eligible to benefit from HIPC debt relief. However, it does not qualify for assistance under the HIPC Initiative because its indebtedness rations at end-2006 are estimated to be below the HIPC Initiative thresholds.

  • Haiti and Afghanistan reached decision point in November 2006 and July 2007, respectively, bringing the number of countries that have reached decision point but not yet completion point (i.e. interim countries) to nine.

  • Since August 2006, three HIPCs have reached completion point (Malawi, Sao Tomé and Príncipe, and Sierra Leone), bringing the number of post-completion-point countries to 22.

  • In 2007, the Inter-American Development Bank (IaDB) joined IDA, IMF, and the African Development Fund (AfDF) in providing 100 percent debt relief on eligible debt upon reaching completion point (Box 1).6 All post-completion-point HIPCs have received debt-stock reductions under the MDRI from these four multilateral institutions.7

    The Inter-American Development Bank Debt Relief Initiative of 2007

    In March 2007, the Board of Governors of the Inter-American Development Bank announced the IaDB-07 Initiative, which provides debt relief beyond the HIPC Initiative to post-completion-point HIPCs in Latin America and the Caribbean.

    The IaDB-07 Initiative parallels the MDRI implemented by IDA, IMF and AfDF, as it provides 100 percent debt relief on credits disbursed to HIPCs before end 2004 under the IaDB’s concessional window and still outstanding on January 1, 2007, or the date of the completion point. IaDB is expected to finance the cost of foregone income with internal resources supplemented by contributions from both borrowing and non-borrowing member countries.

    In May 2007, debt relief amounting to US$3 billion in principal amount cancelled (in nominal terms) was delivered retroactively to January 1, 2007 to Bolivia, Guyana, Honduras and Nicaragua. Haiti, the only remaining HIPC that has IaDB-07 eligible debt to the IaDB, is expected to receive about $0.4 billion in principal amount cancelled (in nominal terms) of IaDB-07 debt relief upon reaching its completion point.

Progress of Countries in Reaching the HIPC Initiative Decision and Completion Points

4. In several pre-decision-point HIPCs, progress toward the qualification for HIPC Initiative debt relief has been hindered by internal conflict, governance issues, substantial arrears to multilateral institutions, and, more generally, difficulties in formulating viable macroeconomic and poverty-reduction programs. To qualify for debt relief under the HIPC Initiative, pre-decision-point countries must build a track record of policy performance under IMF and IDA-supported programs, and put in place a satisfactory poverty reduction strategy.8 Four countries currently have IMF-supported programs (Central African Republic, Cote d’Ivoire, the Kyrgyz Republic, and Nepal). In Liberia, Somalia, Sudan and Togo the existence of large arrears to multilateral institutions remains an obstacle to engaging in IMF- and IDA-supported programs.9 Eight of the ten pre-decision-point countries have poverty reduction strategy papers (PRSPs) in various stages of preparation, and six have already completed an Interim PRSP.

5. With regard to interim countries, four out of the nine countries have been satisfactorily implementing their macroeconomic policy programs and are making progress in fulfilling their completion-point triggers.10 After having experienced interruptions in the implementation of its macroeconomic program in the past several years, the Gambia has begun implementing a new IMF-supported program. Haiti has been recovering from political turmoil and continues to strengthen its macroeconomic performance. Afghanistan and Burundi have also been moving ahead with their macroeconomic policy agenda. The remaining five interim HIPCs (Chad, Guinea, Guinea-Bissau, Democratic Republic of the Congo (DRC), and Republic of Congo) have experienced interruptions in their IMF-supported programs and have faced difficulties in meeting their completion-point triggers.11

6. Six of the interim HIPCs have completed the preparation of a PRSP. Burundi, Chad, the DRC, the Gambia, Guinea-Bissau, and Guinea have adopted a full PRSP. Three other countries are currently finalizing their PRSPs. The Republic of Congo’s final PRSP draft is expected by end-2007. The authorities in Haiti and Afghanistan are currently preparing their PRSP and expect to conclude the process by end-2007 and early 2008, respectively.

7. The average length of time that HIPCs spend between decision and completion points has increased since 2000, reflecting challenges in meeting completion-point triggers. Interim periods have ranged from three months in Uganda (which was a “retroactive” case for purposes of the enhanced HIPC Initiative) to more than six years in Sao Tomé and Príncipe (Figure 1). Although countries’ experiences are diverse, two observations can be made. First, most HIPCs that reached completion point early had made substantial progress in economic reforms under the original HIPC Initiative. The average interim period for countries that participated in the original HIPC Initiative is nearly two years shorter than for those that joined under the enhanced HIPC Initiative (2 vs. 3.8 years). Second, post-conflict HIPCs have needed or may need longer interim periods to address institutional weaknesses and gather sufficient political support to implement sustained reforms.12

Figure 1.
Figure 1.

Interim Period in 31 Post-Decision-Point HIPCs 1/

(In years)

Citation: Policy Papers 2007, 031; 10.5089/9781498333375.007.A001

Sources: HIPC Decision and Completion Point Documents.1/ Length of the interim period under the enhanced HIPC Initiative.

B. Impact of the HIPC Initiative and the MDRI

Impact on Resource Availability and Poverty-Reducing Expenditures

8. Debt-service payments of the 31 post-decision-point HIPCs have declined as a result of debt relief under the HIPC Initiative and the MDRI. For HIPCs, the median debt-service payment per capita has decreased from US$9.2 in 2000 to US$6 in 2005 (Figure 2).

Figure 2.
Figure 2.

Median Debt Service Per Capita for 31 Post-Decision-Point HIPCs 1/

(In U.S. dollars)

Citation: Policy Papers 2007, 031; 10.5089/9781498333375.007.A001

Source: IDA and IMF estimates.1/ Includes 22 post-completion-point, and 9 interim HIPCs.

9. In 2007, annual debt-service savings from the MDRI for the 22 post-completion-point countries are expected to amount to US$1.3 billion, equivalent to about 1 percent of these countries’ GDP on average. These savings vary considerably across countries, from 0.3 percent of GDP for Zambia to 1.8 percent of GDP for Guyana (Appendix Table 2). All countries have simultaneously increased budgetary allocations to pro-poor growth programs. The Government of Malawi has done so indirectly, stating its intention to use the relief to increase pro-poor spending in future years and reduce domestic debt levels. Sao Tomé and Príncipe and Sierra Leone have also incorporated MDRI savings within their budgets for 2007 in line with their PRSP priorities. In general, countries that have benefited from the MDRI are expected to use the available resources to increase poverty-reducing spending and to help meet the MDGs.13

Table 2.

Debt Service of 31 Post-Decision-Point HIPCs, 2000-2011

(In millions of U.S. dollars, unless otherwise indicated)

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Note: Data corresponding to years of decision and completion points are in thin and thick boxes, respectively.Note: Data corresponding to years of decision and completion points are in thin and thick boxes, respectively.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.

Debt service due after the full use of traditional debt relief and assistance under the enhanced HIPC Initiative. For completion-point HIPCs, figures are after additional bilateral assistance beyond the HIPC Initiative.

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

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

10. The decrease in debt-service has been accompanied by an increase in poverty-reducing expenditures (Figure 3 and Appendix Tables 1 and 3). Poverty-reducing expenditures in post-decision-point HIPCs have increased on average from under 7 percent of GDP in 2000 to 9 percent in 2006. In nominal terms, poverty-reducing expenditures amounted to US$17 billion in 2006, which represents an increase of US$3 billion since 2005. These expenditures are more than five times the level of debt-service payments after debt relief.

Figure 3.
Figure 3.

Average Debt-service and Poverty Reducing Expenditure of Post-Decision Point HIPCs 1/

Citation: Policy Papers 2007, 031; 10.5089/9781498333375.007.A001

Sources: HIPC documents; and IMF staff estimates.1/ Prior to 2006, figures represent debt-service paid, and thereafter, debt-service figures are projected. For detailed country data refer to Appendix Table 2.
Table 1.

Summary of Debt Service and Poverty Reducing Expenditures 2000-2011 1/

(In millions of U.S. dollars, unless otherwise indicated)

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

Data refer to 31 post-decision-point HIPCs, unless specified otherwise.

Excludes Afghanistan for which data for early years are not available.

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 2000-2006, and debt service due covers 2007-2011. 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 appendix table 2 for a detailed breakdown.

Excludes Afghanistan and Haiti for which data is not available.

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