Heavily Indebted Poor Countries (HIPC) Initiative 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. Introduction1

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 1/

    (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, São 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, Côte 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, GuineaBissau, 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 São 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, 040; 10.5089/9781498333283.007.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, 040; 10.5089/9781498333283.007.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. São 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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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, 040; 10.5089/9781498333283.007.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.

11. Cumulative debt-service savings under the MDRI to post-completion-point countries are estimated at US$21.1 billion in end-2006 NPV terms (Table 2). It is estimated that interim and pre-decision-point countries will benefit from further savings of US$5.7 billion in end-2006 NPV terms upon reaching completion point.

Table 2.

MDRI Debt-Service Savings by Creditor and Country Group

(In billions of U.S. dollars, in end-2006 NPV terms)

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Sources: World Bank, IMF, AfDB and IaDB staff estimates.

These countries have qualified for MDRI relief. Figures are based on actual commitments. Excludes IMF assistance to Cambodia and Tajikistan.

Estimates are preliminary and subject to a number of assumptions, including the timing of HIPC decision and completion points, and, where applicable, arrears clearance.

IMF MDRI debt relief to Cambodia and Tajikistan.

Impact on Debt Stocks and Debt Sustainability

12. Debt relief provided under the HIPC Initiative framework and the MDRI are expected to reduce the debt stock of the 31 post-decision-point HIPCs by US$96 billion in end-2006 NPV terms (Figure 4).14 Traditional debt relief and HIPC Initiative assistance are projected to reduce the total debt stocks of these countries from about US$105 billion to US$40 billion, in end-2006 NPV terms.15 Voluntary additional bilateral debt relief and assistance under the MDRI would further lower debt stocks to about US$9 billion in end-2006 NPV terms. Debt stocks in the 22 post-completion-point countries are expected to decline from a total of US$76 billion to US$5 billion in end-2006 NPV terms after MDRI.

Figure 4.
Figure 4.

Post-Decision-Point HIPCs’ Debt Stock before and after the HIPC Initiative, Additional Bilateral Debt Relief and the MDRI 1/

(In billions of U.S. dollars, in end-2006 NPV terms)

Citation: Policy Papers 2007, 040; 10.5089/9781498333283.007.A001

Sources: HIPC Initiative country documents, and IDA and IMF staff estimates.1/Estimates based on decision point debt stocks.

13. Debt burden indicators have declined in post-completion-point HIPCs (Figure 5 and Appendix Tables 1 and 2). Their debt-service-to-export ratios, on average, have been reduced from over 18 percent before the decision point to 8 percent four years after the decision point. Bank-Fund staff projections show that the average debt-service-to-exports ratio of post-decision-point HIPCs is expected to fall from 9.7 percent in 2005, the year before MDRI was implemented, to 3.3 percent in 2011 (Appendix Table 1). The NPV of debt-to-exports ratio in post-completion-point HIPCs has declined in the four years after the decision point, with the cumulative reduction over five years amounting to 152 percentage points, of which 24 percentage points was due to a decrease in debt stocks and 128 percentage points were due to increase in exports.

Figure 5.
Figure 5.

Debt Ratios and Risk of Debt Distress in Post-Completion-Point HIPCs

Citation: Policy Papers 2007, 040; 10.5089/9781498333283.007.A001

Sources: Country authorities, IMF and World Bank staff estimates.Calculations exclude Malawi where comparable data were not available. For details on the estimates of the present value of debt, see Dikhanov, Y. (2003) ‘‘Reconstruction of Historical Present Value of Debt for Developing Countries, 1980-2001: Methodology and Calculations,’’ World Bank, Development Economics Data Group.Debt distress classification for post-completion-point HIPCs refers to the assessment made under the latest available joint IMF-World Bank Debt Sustainability Analyses (DSAs) as of July 2007 and includes the effect of MDRI.

14. Notwithstanding the decline in debt burdens, long-term debt sustainability remains a challenge for HIPCs (Figure 5). Although HIPC Initiative and MDRI debt relief have contributed to improved debt indicators, only ten of 22 post-completion-point HIPCs are classified as having a low risk of debt distress with the remainder being at either moderate (11 countries) or high risk (one country).16 This suggests that underlying vulnerabilities remain and must be addressed. While policies aimed at diversifying exports, strengthening institutions, and using external resources efficiently are paramount for long-term debt sustainability, prudent borrowing in line with a country’s repayment capacity is also crucial.17 The case of Burkina Faso illustrates these findings (Box 2).

Debt Relief and Debt Sustainability: The Case of Burkina Faso

The HIPC Initiative and the MDRI have substantially reduced Burkina Faso’s debt burden. The debt has declined from about US$ 1.1 billion to US$259 million in end-2006 NPV terms, with a reduction in the NPV of debt-to-exports ratio of approximately 150 percentage points (Figure B1). The resulting drop in projected debt ratios substantially reduced the risk of debt distress.

Figure B1.
Figure B1.

Burkina Faso: Evolution of the NPV of Debt-to-Exports Ratio

Citation: Policy Papers 2007, 040; 10.5089/9781498333283.007.A001

However, debt relief by itself cannot address vulnerabilities stemming from the volatility of the terms-of-trade. Burkina Faso’s economy remains highly dependent on cotton, which accounted for nearly 60 percent of the value of exports in 2006. Large fluctuations in the price of cotton, as well as the susceptibility of the crop to weather shocks, have led to high economic volatility. Burkina Faso has experienced frequent and severe shocks to its terms of trade and to export growth (Figure B2). Due to high vulnerability to such shocks, Burkina Faso’s risk of debt distress is classified as moderate.1

Figure B2.
Figure B2.

Terms of Trade Volatility of Burkina Faso and non-HIPC LICs

Citation: Policy Papers 2007, 040; 10.5089/9781498333283.007.A001

Burkina Faso’s long-term debt sustainability will depend primarily on increasing the economy’s resilience through diversifying exports and strengthening institutions. The LIC DSA can help identify challenges to debt sustainability and inform the financing decisions of both the country and its creditors. In view of the moderate risk of debt distress identified in the LIC DSA, IDA and AfDB have shifted, in line with their policies, their financing terms from 100 percent loans to a mix of 50 percent loans and 50 percent grants.

1/ For details on risk classification