Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) - Status of Implementation 2008

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). With a view to the upcoming Financing for Development meetings in Doha, the report not only reports on recent progress since mid-2007, but also on developments since the Monterrey Consensus recommendations on external debt relief.


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). With a view to the upcoming Financing for Development meetings in Doha, the report not only reports on recent progress since mid-2007, but also on developments since the Monterrey Consensus recommendations on external debt relief.

I. Introduction2

1. This report reviews the implementation of the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). With a view to the upcoming Financing for Development meetings in Doha, which will focus on the implementation of the Monterrey Consensus, this year’s report takes stock of the progress made by the World Bank and IMF in implementing the Consensus recommendations on external debt relief (Section II).3 Section III updates the information on the estimated costs of HIPC Initiative and MDRI debt relief. Section IV discusses the remaining challenges in implementing the HIPC Initiative, namely: (i) entering and/or completing the HIPC Initiative process for pre-completion-point HIPCs; (ii) ensuring full participation of all creditors; and (iii) mobilizing additional resources to finance debt relief under both initiatives. Section V discusses the debt sustainability outlook in post-completion-point HIPCs.

II. Debt Relief in HIPCs: What has Been Achieved Since Monterrey?

A. Background

2. The international community reached a consensus in March 2002 on a global response to address the challenges for financing development. Mobilizing and increasing the effective use of financial resources was seen as a crucial first step to help create the national and international conditions necessary for meeting internationally agreed development goals.

3. Key recommendations were put forward regarding external debt relief. The Monterrey Consensus noted that external debt relief could play a key role in liberating resources that could then be directed towards activities consistent with attaining sustainable growth and development. Debt relief measures should, where appropriate, be pursued vigorously and expeditiously. More specifically, the Consensus:

  • welcomed initiatives that had already been undertaken, such as the HIPC Initiative, and invited further measures as appropriate;

  • called for the speedy, effective, and full implementation of the HIPC Initiative, which should be fully financed through additional resources;

  • stressed the importance of continued flexibility, particularly regarding the application of the eligibility criteria;

  • recommended that debt relief analysis at the completion point take into account any exogenous factors, such as worsening global growth prospects or declining terms of trade; and

  • suggested taking into account the impact of debt relief on progress towards the achievement of the Millennium Development Goals (MDGs).

B. Recent Developments and Implementation of the Consensus Recommendations

4. Substantial progress has been made in the implementation of the HIPC Initiative. More than three quarters of eligible countries (33 out of 41) have passed the decision point and qualified for HIPC Initiative assistance. Of those, 23 countries have reached the completion point and qualified for irrevocable debt relief under the HIPC Initiative and MDRI, most of them (19) since the Monterrey conference (Table 1). Since the last Status of Implementation report, the Central African Republic and Liberia reached the decision point in September 2007 and March 2008, respectively, bringing the number of interim HIPCs to ten, and The Gambia reached the completion point in December 2007.4

Table 1.

List of Heavily Indebted Poor Countries (as of end-July 2008)

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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.

The Kyrgyz authorities indicated in early 2007 that they did not wish to avail themselves of the HIPC initiative but subsequently expressed interest for the MDRI. At end-2007, indebtedness indicators were estimated to be below the applicable HIPC Initiative thresholds, while income levels were estimated to be above the IMF MDRI thresholds.

5. The overall assistance committed to the 33 post-decision-point HIPCs amounts to US$117 billion (in nominal terms), including US$49 billion under the MDRI. This represents on average about 50 percent of these countries’ 2007 GDP. As a result of this debt relief, as well as relief under traditional mechanisms and additional beyond HIPC relief from some creditors, the debt burden of the 33 post-decision-point HIPCs is expected to be reduced by about 90 percent, compared to their pre-decision-point debt stock.

6. While preserving the HIPC Initiative’s core principles, flexibility has been often exercised to facilitate HIPCs’ receipt of debt relief. In particular, as the universe of countries in need of debt relief changed, with a growing share of post-conflict cases, operational modalities were adapted to fit their challenging circumstances better.

  • Eligibility criteria were reviewed to ensure that no country with debt burdens in excess of the HIPC Initiative’s thresholds would be left without a comprehensive framework to address its debt problems. Eligibility initially required meeting the Initiative’s debt and income criteria, and having started a Fund- or IDA-supported program in the period following the launch of the Initiative in 1996. A sunset clause on eligibility was introduced early (and renewed four times) to prevent the Initiative from becoming permanent, minimize potential moral hazard arising from excessive borrowing in anticipation of debt relief, and encourage early adoption of reforms. In 2006, the Executive Boards of the IMF and the IDA endorsed and closed (“ring-fenced”) the list of countries eligible or potentially eligible at that time but clarified that it could be amended to include other countries that would meet, in the future, the Initiative’s income and indebtedness criteria using end-2004 data.5 For instance, Afghanistan, although not on the 2006 list, was later found to be eligible for HIPC Initiative assistance and reached the decision point in July 2007.

  • The definition of a satisfactory track record of policy performance—a requirement for reaching both decision and completion point under the HIPC Initiative—has also been applied flexibly. While the PRGF-HIPC Trust Instrument provides for a track record of normally three years of sound policies under a Fund or IDA-supported program to reach the decision point and another three years to reach the completion point, the practice in recent years has been to consider satisfactory a much shorter track record, with a minimum of six months in each case. The instruments that may be used to establish the pre-decision-point track record have been modified: since 2003, programs supported under Emergency Post-Conflict Assistance (EPCA) have also been used (in addition to programs supported under the PRGF, ESF, EFF, SBAs, RAP and SAF) to establish the pre-decision-point track record (e.g., Haiti). Since early 2008, to give credit to countries implementing sound economic policies but where the existence of protracted arrears precludes other forms of Fund engagement, performance under staff-monitored programs (SMPs) that have been found by the Fund’s Executive Board to have policies meeting the standards required for arrangements in the upper credit tranches or under the PRGF may count toward the track record for the decision point (e.g. Liberia).6

  • The HIPC Initiative provides incentives for early pre-decision-point clearance of arrears. Clearance of arrears has been allowed to be counted towards a creditor’s expected debt relief under the Initiative. Since 2002, multilateral creditors have cleared arrears in Burundi, Central African Republic, Democratic Republic of the Congo, Haiti, Liberia, Togo, and Côte d’Ivoire. The Bank and the Fund coordinate closely with other Multilateral Development Banks’ arrears clearance operations. 7 IDA has also developed a framework to provide additional concessional financing for fragile states before and after arrears clearance and to help countries improve government accountability and strengthen institutional capacity.8

  • There has also been flexibility regarding the preparation and implementation of poverty reduction strategies. The ability to reach the decision point on the basis of a satisfactory poverty reduction strategy set out in an interim poverty reduction strategy paper has allowed countries with limited administrative capacity to reach the decision point more easily. A full PRSP (including a one-year implementation period) is required only for reaching the completion point. Most HIPCs have availed themselves of this flexibility at the decision point.

  • Interim relief limits have been increased in exceptional cases. Both the Bank and the Fund have established caps on their provision of relief between the decision and completion point to provide incentives for the timely implementation of reform programs. For the Bank, the assistance is normally capped at one third of the relief committed at the decision point; for the Fund, it is capped at 60 percent of the relief committed at the decision point (and no more than 20 percent for each 12-month period) but in exceptional circumstances interim assistance can be raised to 75 percent (and 25 percent for each 12-month period). The Bank raised its cap to 50 percent for Guinea, Guinea-Bissau and Haiti; and the Fund has applied its exceptional circumstances limit for Zambia and Sierra Leone, to align the provision of HIPC interim assistance with the profile of their debt service to the Fund. 9

  • Judgment has been used to assess progress towards completion-point triggers. Based on staffs’ assessment of progress in implementing the completion-point triggers, the IDA Board has flexibility in deciding if the country reaches completion point in spite of not fully meeting all the triggers, while the Fund Board can formally grant waivers. To date, 14 of the 23 post-completion-point HIPCs were granted waivers at the completion point for failing to implement one or more triggers. Judgment has been applied in cases of long interim periods, which increase the likelihood that unforeseen events make some triggers less relevant or adapted to the country’s evolving situation.

7. The HIPC Initiative framework has been adapted to take into account the impact of exogenous factors on debt relief recipients. Additional debt relief (“topping-up assistance”) has been provided when, by the time a HIPC reached the completion point, debt burden indicators had deteriorated because of factors beyond the country’s control. The additional relief helps ensure that the debt burden is still lowered to no more than the HIPC Initiative thresholds. Topping-up is provided when a country’s economic conditions have suffered a fundamental change because of unanticipated exogenous developments such as natural calamities or a decline in the terms of trade.10 Six of the 23 countries that have reached the completion point have benefited from topping-up assistance (Burkina Faso, Ethiopia, Malawi, Niger, Rwanda, and São Tomé and Príncipe).

8. Further debt relief has been provided through the MDRI to accelerate progress towards the MDGs. The MDRI was first proposed in June 2005 by the Group of 8 (G-8) major industrial countries and was implemented in 2006 by the IMF, IDA, and the African Development Fund (AfDF). In early 2007, the Inter-American Development Bank (IaDB) also decided to provide similar debt relief to the five HIPCs in the Western Hemisphere. Under the MDRI, debt relief is provided in respect of 100 percent of these institutions’ eligible debt claims on countries that reach the completion point under the HIPC Initiative.11 The objective was to provide substantial additional debt relief to free up resources to help HIPCs reach the MDGs.

9. While poverty-reducing expenditures have increased and debt service has declined concomitantly, the impact of debt relief on attaining the MDGs has been hard to quantify. One would intuitively expect debt relief, especially when massive, to contribute significantly to poverty reduction, by freeing up resources for poverty-reducing spending.12 However, this result has been difficult to establish empirically, given data limitations and the multiplicity of channels at play. Empirical work has instead focused on the link between debt relief and poverty reducing expenditures, which is easier to measure than social outcomes. For HIPCs, there appears to be a strong positive correlation between the reduction in debt service and the increase in poverty-reducing spending: as Figure 1 shows, poverty-reducing spending has increased by about 2 percent of GDP in HIPCs since the late 1990s, while debt service has decreased by about the same amount. Recent empirical research also seems to suggest that debt relief has not affected negatively revenue mobilization, an important development if debt relief is to increase fiscal space (Box 1).

Figure 1:
Figure 1:

Average Debt Service and Poverty Reducing Expenditures1/

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.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.

Debt Relief, Poverty-Reducing Expenditures (PRE), and Revenue Mobilization

Debt relief could contribute to higher PRE in two ways. First, debt relief creates fiscal space that may be used for PRE. Second, a reduction in the debt stock eases the government’s intertemporal budget constraint, and may facilitate borrowing to raise PRE. The first effect would be limited if debt relief is provided in the form of arrears clearance, which would not reduce debt service due. The latter channel may not work in countries which are still credit constrained, like HIPCs in the interim period.

Empirical research on the effect of debt relief on PRE has been sparse, mainly due to difficulties in obtaining consistent data across countries.1/ Usually PRE include expenditures on health and education, but also in some countries capital expenditures on infrastructure, land irrigation, etc. The results of recent studies have been mixed:

  • Chauvin and Kraay (2005) focused on the effects of debt relief on expenditures on health and education and did not find any significant effect. However, partly due to difficulties in obtaining debt service relief data, this study only looked at the effect of the reduction in debt stocks.

  • Thomas (2006) attempted to take into account a number of factors that may affect social expenditure (defined as expenditure on health and education), in addition to debt relief. Among those factors are foreign aid, output per capita, urbanization, and a target variable—the literacy rate. The study includes both LICs and MICs (110 countries) over 1985-2004. The results suggest that a decline in debt-service costs helps raise health and education expenditures significantly in LICs (a 1 percent decline in debt service increases these expenditures by 0.35 percent of output in the long run).

  • Cassimon and Van Campenhout (2006), using vector autoregressive techniques, found a positive effect of debt relief on overall investment spending, rather than PRE, in African HIPCs.

A related issue concerns the effect of aid, including in the form of debt relief, on incentives to collect revenue. Some argue that aid, especially in the form of fungible grants, could reduce the incentive to collect more revenue, particularly when it entails politically difficult decisions.2/ If true, the impact of debt relief on freeing up financial resources for PRE could be diminished. The counterargument, however, is that debt relief allows revenue efforts to be used on domestic programs, rather than for the service of external debt; in this sense, revenue efforts have more direct benefits for the population and are easier to justify and undertake.

  • In a survey of earlier studies, Gupta, Powell, and Yang (2006) found that the empirical evidence on how aid flows affect domestic revenue collection is mixed, with the magnitude, sign, and significance of the impact of aid varying by study. With a few notable exceptions, however, the impact of aid is found to be either negative or insignificant.

  • Two recent studies on HIPCs do not find evidence of adverse effect of debt relief on revenue efforts. Cassimon and Van Campenhout (2006) found a significant positive response of tax revenue to debt relief. Kpodar and Unigovskaya (forthcoming) compare the revenue effort of HIPCs to that of other LICs (a sample of other PRGF-eligible countries is used as a control group) using panel data analysis. They find no evidence of an adverse effect. The result of both studies, however, should be treated with caution due to data limitations.

1/ See: Chauvin and Kraay, “What Has 100 Billion Dollars Worth of Debt Relief Done for Low-Income Countries?” (September 2005). Available at SSRN: http://ssrn.com/abstract=818504; and Thomas, “Do Debt-Service Savings and Grants Boost Social Expenditures?”, IMF Working Paper No. 2006/180. Available at: http://www.imf.org/external/pubs/cat/longres.cfm?sk=19272.0.2/ See: Cassimon and Van Campenhout, “Aid Effectiveness, Debt Relief and Public Finance Response. Evidence from a Panel of HIPCs”, WIDER Research Paper No. 2007/59, Helsinki: UNU-WIDER; Kpodar and Unigovskaya, “Does debt Relief Under the HIPC Initiative Undermine Domestic Revenue Mobilization Effort?”, IMF Working Paper, (forthcoming); and Gupta, Powell, and Yang “Macroeconomic Challenges of Scaling Up Aid to Africa”, IMF, 2006.

C. Conclusions

10. The Bank and the Fund, together with the international community, have taken substantial steps to meet the Monterrey Consensus commitments on debt relief, and as a result debt burdens have been reduced markedly for many HIPCs. Progress was made on each of the recommendations. Together, the Bank and the Fund have already committed debt relief amounting to US$16.3 billion (in end-2007 NPV terms) to the 33 post-decision-point countries under the HIPC Initiative and an additional US$17.8 billion has been delivered to the 23 post-completion-point countries under the MDRI.

11. Completing the implementation of the HIPC Initiative will require sustained efforts from the international community—creditor and pre-completion-point countries. Despite the achievements described above, a number of challenges remain to be addressed for a full implementation of the Initiative, such as: (i) full financing of the HIPC initiative and MDRI; (ii) full participation of official and commercial creditors to the Initiative; and (iii) support to the remaining countries to reach completion point.

12. Debt relief, while welcome, addresses only a relatively small part of HIPCs’ financing needs and cannot ensure debt sustainability permanently. Debt relief savings accrue through time and generally constitute only a fraction of net aid inflows to HIPCs.13 Addressing HIPCs’, and more generally LICs’, development needs therefore requires higher new aid flows in addition to debt relief. New flows also allow for a quick and targeted response to address any emerging issues, such as the recent surge in food and fuel prices.14 These new flows need to be on appropriate terms to make sure that debt sustainability, which has been restored through debt relief, is maintained in the future.15

13. In recognition that debt relief alone would not be sufficient to ensure long-term debt sustainability, the Monterrey Consensus also called for other measures, which are supported by the Bank and the Fund. The Monterrey Consensus: (i) highlighted the role of comprehensive strategies in reducing the vulnerability of debtor countries; (ii) called for debtors and creditors to share the responsibility for preventing and resolving unsustainable debt situations; and (iii) called for the strengthening of technical assistance for debt management and debt tracking. In the past few years, the Bank and the Fund have actively helped HIPCs preserve the benefits from debt relief and mobilize resources to meet their development needs in a sustainable manner. Bank and Fund efforts in this area are detailed in Section V.

III. An Update on the Costs of the HIPC Initiative and the MDRI

14. The total cost to creditors of HIPC Initiative debt relief is estimated at US$71 billion in end-2007 NPV terms (Table 2).16 Nearly half of the cost, or US$35 billion, represents irrevocable debt relief to the 23 post-completion-point countries. The cost for the 10 interim countries amounts to US$16 billion, an increase of almost 25 percent from last year mainly on account of the inclusion of two new post-decision-point countries—the Central African Republic and Liberia (US$0.6 billion and US$2.8 billion, respectively). The estimated cost of HIPC Initiative debt relief to the remaining eight pre-decision-point HIPCs is estimated to be US$20 billion, most of which is accounted for by three countries—Sudan, Côte d’Ivoire and Somalia. Topping-up assistance (received so far by six HIPCs) only represents 3 percent of the total HIPC Initiative cost.

Table 2.

HIPC Initiative: Costs by Main Creditor and Country Group

(In billions of U.S. dollars, in end-2007 NPV terms, unless otherwise indicated)

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Sources: Country authorities, and World Bank and IMF staff estimates.

Total costs as reported in Table 3 of “HIPC Initiative and MDRI: Status of Implementation, September 2007”, discounted to end-2007 terms.

2/ Since August 2007, the Gambia reached completion point; the Central African Republic and Liberia reached the decision point.

15. Multilateral and Paris Club creditors shoulder most of the total HIPC Initiative cost (46 percent and 36 percent respectively; Figure 2). Among multilateral creditors, the heaviest burdens are borne by IDA (20 percent), the IMF (9 percent) and the AfDB Group (7 percent). The share of total cost borne by multilateral creditors is higher for post-completion-point countries (at 54 percent) than for interim countries (43 percent) or pre-decision-point countries (33 percent). The share of Paris Club creditors is about one third for post-completion-point and pre-decision-point countries, but much higher (44 percent) for interim countries.

Figure 2.
Figure 2.

Distribution of Potential Costs under the HIPC Initiative and MDRI by Creditor

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

Sources: HIPCs decision and completion point documents.Note: * Excludes non-HIPCs.

16. With respect to MDRI, the total cost to the four participating creditors is estimated at US$28 billion in end-2007 NPV terms (Table 3). About two thirds has already been delivered to the 23 post-completion-point countries. Two thirds of the total estimated MDRI cost will be borne by IDA, with the share of the IMF, AfDF and IaDB amounting to 14, 13, and 8 percent, respectively.

Table 3.

MDRI Costs by Creditor and Country Group

(In billions of U.S. dollars and in end-2007 NPV terms)

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

These countries have qualified for MDRI relief. Figures are based on actual disbursements and commitments.

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

The estimated costs for IMF reflect the stock of debt eligible for MDRI relief, which is the debt outstanding (principal only) as of end-2004 and that has not been repaid by the member and is not covered by HIPC assistance (http://www.imf.org/external/np/pp/eng/2005/111605.htm).

IMF MDRI assistance to Cambodia and Tajikistan.

IV. Remaining Challenges

17. Completing the implementation of the HIPC Initiative will entail addressing three main challenges: (i) taking the remaining 18 pre-completion-point countries to the completion point; (ii) ensuring full participation of all creditors; and (iii) mobilizing additional resources to finance debt relief to all remaining HIPCs.

A. Taking Remaining Countries through the HIPC Initiative Process

18. Many of the 18 pre-completion-point HIPCs face common challenges, beyond meeting the HIPC Initiative’s requirements. These challenges include preserving peace and stability, and improving governance and delivery of basic services. Most of these countries are fragile states.17 Almost half of pre-completion-point countries have been affected by war in recent years, and many remain at a high risk of conflict and/or political instability. Most of those countries have weak policies and institutions: they are all poor performers according to the Country Policy and Institutional Assessment (CPIA) rating and their performance is on average worse than that of post-completion-point countries (Figure 3).18

Figure 3:
Figure 3:

Policy Performance and Prevalence of Conflicts in HIPCs

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

Source: World Bank1/ As measured by the CPIA at DP2/ For Pre-DP HIPCs refers to latest available CPIA3/ Pre-DP excludes unavailing HIPCs (Kyrgyz and Nepal) and Somalia (data unavailable)Source: UCDP/PRIO Armed Conflict Dataset1/ Pre-DP countries: presence of conflict in the last 3 years

19. Despite these challenges, more than half of these countries are making progress under the Initiative:

  • Three pre-decision-point HIPCs—Comoros, Côte d’Ivoire, and Togo—are making progress towards the decision point. This year, Côte d’Ivoire and Togo cleared arrears to major creditors, including IDA, and are on track with the implementation of their Fund-supported programs (EPCA and PRGF respectively). Both countries are making notable progress with the preparation of their PRSPs. Togo and Côte d’Ivoire could reach the decision point by end-2008. Comoros cleared its arrears to the AfDB and, following the resolution of a short internal conflict, Fund support under EPCA is being discussed with the authorities.

  • Seven interim countries—Afghanistan, Burundi, the Central African Republic, Guinea, Guinea-Bissau, Haiti, and Liberia—are advancing towards the completion point. All of them are currently on track with the implementation of their Fund-supported programs (all but Guinea-Bissau have a PRGF-supported program), although some have faced challenges, as indicated in the appended country notes, in the implementation of the floating completion point triggers. Burundi and Guinea— one of the countries with the longest interim period—are expected to reach the completion point in late 2008 or early 2009 (Figure 4).

    Figure 4.
    Figure 4.

    Duration of the Interim Period under the HIPC Initiative

    (In years)

    Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

    Source: HIPC Decision and Completion Point documents.

20. The main obstacles to the other eight countries’ progress under the Initiative are of a political or security nature:

  • The Kyrgyz Republic and Nepal, which both have declining debt ratios, have not expressed a willingness to avail themselves of the HIPC Initiative.

  • Somalia and Sudan have protracted arrears to multilateral institutions. Prior to reaching the decision point, they will first need to mobilize resources to finance the clearance of their arrears. Mobilizing such resources will be challenging, given the size of arrears. In addition, the two countries will need to resolve their security situation.

  • Eritrea’s authorities indicated in 2008 discussions that they would give serious consideration to seeking HIPC initiative assistance once the external security situation improves.

  • Finally, the existence of natural resources gives Chad and the Republic of Congo access to alternative sources of external financing which may have reduced the urgency of getting debt relief and contributed to these countries’ slow progress towards the completion point. In the case of the Democratic Republic of the Congo, although an unsatisfactory track record of policy implementation has been the primary factor in delaying access to debt relief, the recent contracting of a large resource-backed nonconcessional government-guaranteed debt is causing further delays.

21. The absence of progress under the HIPC Initiative may have a number of negative consequences for the concerned countries:

  • Some pre-decision-point HIPCs whose debt ratios are improving may at some point no longer meet the debt qualification criteria.19 Such a situation might create an incentive not to service outstanding debt and to run arrears to ensure that debt remains high enough for qualification purposes. These arrears, in turn, may prevent financing from traditional donors, including the IFIs, and lead these HIPCs to pursue other more expensive sources of financing, such as collateralized nonconcessional borrowing.

  • For interim HIPCs, the lack of progress may result in an exhaustion of interim assistance provided by some creditors and difficulties servicing external debt obligations. In a fragile environment, where major financing needs for reconstruction and basic social services exist, inability to reach the completion point and benefit from full HIPC Initiative and MDRI debt relief may create the incentive to resort to collateralized nonconcessional borrowing.20

22. Modifying the HIPC Initiative framework would be unlikely to help tackle these issues.21 Given the political and security constraints in fragile HIPCs described above, the only change to the framework that could accelerate access to full debt relief would be to give this relief unconditionally to all the countries meeting the Initiative’s debt and income criteria. However, conditionality under the HIPC Initiative is aimed to provide assurances that resources freed by debt relief will be used productively by HIPCs through the establishment of a stable macroeconomic environment and the implementation of a poverty reduction strategy. In absence of any conditionality, there would be little or no assurance that debt relief resources would be put to best use, particularly in some of the challenging situations described above.

23. The HIPC Initiative framework can address a wide range of country circumstances. Liberia’s recent experience shows that the most difficult cases in the area of debt relief can be addressed within the flexible architecture of the HIPC Initiative (see Box 2). The flexible implementation of the requirements has been guided at each stage by the very objective of the Initiative to reduce the level of external debt burdens in reforming HIPCs. In addition, it should be recognized that the HIPC Initiative is only one of the many instruments for addressing development problems in fragile and conflict-affected states.22

Liberia’s Path to the Decision Point

Liberia’s reaching the decision point is an illustration of the commitment by the international community in addressing the daunting challenges in a fragile, post-conflict country while preserving the HIPC Initiative’s principles.

After over twenty years of political instability, Liberia had accumulated an unprecedented level of arrears: at end-June 2007, of the estimated US$4.7 billion public and publicly-guaranteed external debt, 96 percent was in arrears. In 2006, Liberia began a bold reform program under the leadership of newly-elected President Johnson-Sirleaf but arrears to the Fund and other multilateral institutions prevented it from accessing Fund resources. Additionally, because Liberia’s economic situation required that it be eligible for debt relief on any new financing related to an arrears clearance operation, financing assurances for such relief were necessary before Liberia could engage in any of the available Fund-supported programs that then qualified as a track record of policy performance towards the decision point. Therefore, despite Liberia’s strong track record of reform, the difficulty of mobilizing financing assurances for arrears clearance operation and ultimately HIPC Initiative debt relief risked delaying Liberia’s reaching the decision point. In addition, the lack of reliable information on private debt—most government records were destroyed during the preceding conflict—was a serious challenge for the estimation of the needed debt relief.

Taking into account Liberia’s special situation and the need to support its reform momentum, as well as the recognition of potentially similar issues for other countries with strong policies and performance records, but lacking financing assurances to start a qualifying decision-point track record program, a number of steps were undertaken.

First, the Fund’s PRGF-HIPC Trust instrument was amended to address the problem regarding the inability to establish a qualifying track record as faced by Liberia and other countries in similar situation. Specifically, in January 2008, the Fund’s Executive Board amended the PRGF-HIPC Trust Instrument to add SMPs to the list of instruments that may be used to establish eligibility for HIPC Initiative debt relief, and that may be used to build a track record for reaching the decision point, in cases where the Executive Board agrees with the staff’s assessment that the macroeconomic and structural policies under the SMP meet the policy standards associated with upper credit tranche or PRGF arrangements.1/

Second, a methodology was developed with the assistance of Liberia’s financial advisers and agreed to with private creditors to facilitate commercial debt reconciliation.2/

Third, exceptional funds were allocated for arrears clearance by multilateral institutions. Liberia’s arrears to the World Bank were cleared in December 2007 through a bridge loan provided by a bilateral donor. Liberia then used the proceeds of a Development Policy Operation to repay the bridge loan. This operation was financed with an exceptional allocation of IDA resources provided on grant terms. IDA’s share of HIPC Initiative debt relief was delivered in full through the arrears clearance operation. On the Fund’s side, the necessary financing assurances were acquired largely through commitments by donors of resources arising from a partial refund of SCA-13/ resources and of deferred charges-related adjustments. In March 2008, an arrears clearance operation was conducted with resources from a bridge loan provided by the U.S. Treasury which was followed on the same day by Board approval of Liberia’s exceptional access to Fund financing and its reaching of the decision point. Arrears to the African Development Bank Group were also cleared in December 2007 through an operation under their framework for assisting post-conflict countries. Strategies for arrears clearance with Liberia’s six smaller multilateral creditors were also agreed upon or have been under discussion.

1/ See “Proposals to Modify the PRGF-HIPC trust Instrument—Further Considerations and Proposed Decision“ (12/19/07).2/ See Box 1 in IDA and IMF Republic of Liberia Enhanced HIPC Initiative Decision Point Document. (February 28, 2008).3/ A special account established specifically to protect the IMF against the risk of loss of principal resulting from arrears.

B. Ensuring the Full Participation of All Creditors

24. Smaller multilateral institutions, non-Paris Club official bilateral creditors, and commercial creditors still need to participate more fully in the HIPC Initiative. Together, they are expected to bear about 25 percent of the total HIPC Initiative cost, and therefore their participation does make a significant difference for HIPCs. In addition, their participation is essential for the credibility of the Initiative, to limit the perception of free-riding, and maintain the goodwill of traditional donors.

Multilateral and Paris Club Creditors

25. The World Bank, the African Development Bank, the IMF and the Inter-American Development Bank, as well as all Paris Club creditors, continue to provide debt relief in line with their commitments under the HIPC Initiative, including by providing interim relief to countries that have reached the decision point. Paris Club creditors also continue to provide additional “beyond HIPC Initiative” relief on a bilateral basis.

26. The remaining multilateral creditors represent about 7 percent of the total estimated HIPC Initiative cost.23 Their share of the cost of providing HIPC Initiative relief to post-completion-point countries amounts to US2.7 billion in end-2007 NPV terms. Twenty creditors, representing 99 percent of the amount above, have indicated their intention to participate in the HIPC Initiative (see Appendix Table 5). The other eight creditors have not yet indicated their intention to provide relief under the HIPC Initiative.24

Table 5.

HIPC Initiative: Cost Estimates to Multilateral Creditors and Status of their Commitments to Post-Completion-Point HIPCs

Status as of mid-July 2008

(In millions of U.S. dollars, in end-2007 NPV terms)

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

Estimates based on end-September 2007 data in NPV terms.

As of July 2008, IsDB was in the process of signing debt relief agreements with Cameroon and The Gambia.

27. Due to incomplete information, delivery of HIPC Initiative assistance by smaller multilateral creditors cannot be estimated at this juncture. The majority of the 20 participating creditors has reportedly agreed on the modalities to deliver HIPC Initiative debt relief to their post-completion-point HIPC debtors. Six creditors representing 62 percent of the cost, are known to have provided debt relief in the interim period through debt service reduction or rescheduling of arrears and maturities falling due.25

28. Staffs are working with their counterparts in many of these institutions to improve the availability of information. At the latest annual meeting of multilateral development banks on debt issues, participating institutions agreed on a methodology to compile comprehensive data on their delivery of HIPC Initiative debt relief and on new lending to low-income countries.26 These efforts should allow staffs to report more extensively on this issue in next year’s report.

Non-Paris Club Official Bilateral Creditors

29. The share of HIPC Initiative debt relief delivered by non-Paris Club bilateral creditors, which represent about 13 percent of the total cost, remains low, at around 40 percent (Table 4 and Appendix Table 15).27 Only eight creditors have provided full relief, 22 creditors have provided partial relief, while 21 creditors have not yet delivered any HIPC Initiative debt relief at all. This latter group includes two large creditors (Costa Rica and Taiwan Province of China) accounting for more than 20 percent of the expected debt relief from non-Paris Club creditors.

Table 4.

Debt Relief to Post-Completion-Point HIPCs from Non Paris Club Bilateral Creditors

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Sources: HIPC documents; country authorities; and staff estimates.

Estimates based on information received as of end-June 2008.

Table 15.

Delivery of HIPC Initiative Debt Relief by Non-Paris Club Official Bilateral Creditors 1/

(in millions of U.S. dollars, 2007 NPV terms unless otherwise indicated)

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Sources: HIPC documents; country authorities; and Fund and Bank staff estimates.

This table updates the April 2008 HIPC Scorecard based on information received as of June 2008 and includes methodological changes in the calculation of NPV for countries that have benefited from the Original HIPC initiative.The information covers only creditors that have claims on post-completion-point countries.

While not a member of the Paris Club, Brazil has agreed to participate in the Paris Club rescheduling meeting for most HIPCs and provided substantive debt relief in the context of the Paris Club. South Africa has been classified as a non-Paris Club for Mozambique and Malawi. However, South Africa did not in the Paris Club exit meetings for Benin and Malawi. Similarly, Trinidad and Tobago has been classified as a non-Paris Club for Nicaragua. However, it has provided debt relief to Nicaragua outside of the Paris Club. Brazil has been classified as non-Paris Club only for Bolivia and Guyana, although it actually participated in Paris Club meeting for Bolivia. Brazil did not participate in the Paris Club meeting for Nicaragua. Taking into consideration all relief provided outside the Paris Club would increase the HIPC debt relief provided by Brazil to US$50.1 million and its share of HIPC debt relief provided as a non-Paris Club creditor to 96.2 percent. Portugal has also provided debt relief under the Paris Club.

In these cases, there is only one debtor. Debtors have indicated that some relief has been provided but the information received is insufficient to quantify it.

The debt relief estimates for China are based on debt cancellations data provided by debtors.

Partition of HIPC loans outstanding at decision point and the associated debt relief among members of the Former Yugoslavia is being determined with the help of the authorities.

Guatemala’s claims on Nicaragua were taken over by Spain in a debt swap. Spain has agreed to provide HIPC debt relief to Nicaragua on those claims.

In June 2003, India announced its intention to write off all non-export credit claims on HIPCs. However, several agreements remain unsigned. India has not

yet agreed to provide full relief on export-credit claims.

Debt relief estimates for Kuwait are based on detailed loan by loan information provided by the Kuwait Fund for Arab Economic Development (KFAED).

30. Progress since last year’s report has been limited. Hungary completed its delivery of HIPC Initiative relief and Tanzania confirmed the delivery of full debt relief by Egypt, bringing to eight the number of creditors having provided the expected relief in full. 28 China, Kuwait, and Venezuela signed debt relief agreements with a number of HIPCs in the course of last year.

31. A few creditors are making efforts to lift constraints that hinder their delivery of HIPC Initiative debt relief. Colombia has informed staffs that its congress recently passed a bill to permit the provision of debt relief to Honduras, its only HIPC debtor. Kuwait, a strong supporter of the HIPC Initiative through the Kuwait Fund for Arab Economic Development, reported that it is considering a modification of the rules and laws governing the operations of the Kuwait Investment Authority (KIA) to make them more compatible with the HIPC Initiative.

32. HIPCs’ situation regarding delivered relief from these creditors varies significantly across countries. Four HIPCs (Honduras, São Tomé and Príncipe, Madagascar, and Zambia) have received less than 15 percent of their expected debt relief from non-Paris club creditors. On the other hand, some HIPCs (Benin, Cameroon, Ghana and Sierra Leone) have received more than 75 percent of the expected debt relief, but these HIPCs account for less than 4 percent of the expected HIPC Initiative relief from non-Paris Club creditors.

33. Bank and Fund staffs have continued to encourage non-Paris Club creditors to deliver full HIPC Initiative debt relief. They have prepared technical notes for a few creditors that requested additional information on the methodology for calculating HIPC Initiative debt relief. Discussions with creditors and debtors have continued to take place during Article IV consultation missions. Staffs and the Paris Club Secretariat have conducted joint briefings of debtors on HIPC Initiative implementation issues and ways to maximize debt relief delivery from their creditors.29 Delivery of debt relief has been increasingly monitored in staff reports or debt sustainability analyses on post-completion-point HIPCs. In addition, with the objective of providing information to the public, the estimated delivery of HIPC Initiative debt relief by each of these creditors to post-completion-point HIPCs has been published on the Fund and Bank’s external websites in November 2007 and updated in April 2008.30 Although staffs will maintain their dissemination efforts and provision of technical support, bilateral peer pressures may be required to see additional progress in nonParis Club bilateral creditor participation.

Commercial Creditors

34. The delivery of HIPC Initiative relief by commercial creditors increased markedly last year. Commercial creditors only account for 6 percent of the total HIPC Initiative cost and delivery of the related relief had so far constituted a challenge, with participation in the low single digits until last year. This share increased significantly through March 2008 thanks to a large London Club operation and two successful buybacks supported by the IDA Debt Reduction Facility (DRF). 31

35. In December 2007, the authorities of the Republic of Congo reached a debt restructuring agreement with their commercial creditors, organized as a creditors’ committee (previously known as the London Club). The restructuring operation entailed the issuance of US$477 million of Eurobonds maturing in 2029 in exchange for commercial claims totaling US$2 billion (equivalent to 58 percent of Congo’s external commercial debt). Private creditors, including banks, a few suppliers, and some distressed debt funds, accepted the authorities’ offer with a participation rate of over 92 percent. The debt relief provided by this operation is estimated by staffs to be in line with the effort expected from these creditors under the HIPC Initiative.

36. Since last year’s report, the DRF has helped finance two important debt buybacks—for Mozambique and Nicaragua—and prepare a buyback for Liberia. 32 The IDA DRF operations in Mozambique and Nicaragua together extinguished about US$1.5 billion of commercial external debt on terms at least as favorable as those under the HIPC Initiative. In Nicaragua, US$1.3 billion of commercial debt was extinguished, accounting for 95 percent of the total reconciled eligible commercial debt. In the case of Mozambique, all four eligible commercial external creditors tendered their debt in the buyback operation. In April 2008, a DRF preparation grant for Liberia was approved by IDA’s Executive Board; other operations in HIPCs are at preparatory stages.

37. These developments show the value of a proactive and cooperative approach to debt restructurings involving HIPCs. Such an approach, which staffs encourage HIPCs to implement, is at the core of DRF-supported operations and can lead to mutually beneficial outcomes. In this regard, recent policy modifications will allow the DRF to act more quickly in supporting the preparation of commercial debt reduction operations in countries approaching the HIPC Initiative decision point, and to be more effective in resolving commercial debt burdens in a single operation by ensuring higher creditor participation (Box 3).

The IDA-Debt Reduction Facility: Recent Modifications1/

In April 2008, the IDA’s Executive Board approved changes to the DRF’s policies and practices. The modifications will enable the DRF to be even more effective in helping reforming, heavily indebted IDA-only countries to reduce their sovereign commercial external debt as part of a broader debt resolution program. These modifications incorporate past experience from DRF negotiations and feedback from stakeholders including the Paris Club, the G7 debt experts group, recent DRF-beneficiary governments, and their financial and legal advisers.

The approved modifications include:

  1. Eligibility for DRF preparation grants was extended, on a case-by-case basis, to pre-decision point HIPCs. In 2004, the IDA Board had decided to limit eligibility of the DRF to post-decision-point HIPCs only. This modification gives reforming pre-decision-point HIPCs access to preparation grants to enable them to move faster to decision point. However, eligibility for implementation grants remains at decision point.

  2. Formerly bilateral debts that were sold to commercial creditors after the HIPC decision point reference date will normally no longer be considered eligible for buyback. This modification aims to prevent distressed debt funds from making a profit by buying bilateral claims at a deep discount and tendering them for a buyback under the DRF. It is also aimed to discourage the sale of debt from official to commercial creditors.

  3. For the same reason, formerly domestic debts sold to external creditors after the HIPC reference date will normally be considered ineligible for buyback.

  4. Participation thresholds stipulated for buybacks, including second buybacks, will normally not be below 90 percent. Participation rates in earlier operations were below 80 percent in six cases and below 65 percent in two cases. The increase to 90 percent aims to help resolve the commercial debt problem more comprehensively as well as avoid second buybacks and increase in the value of holdout claims.

  5. IBRD contributions to DRF will normally not exceed 50 percent of the costs of any given implementation grant. Exceptions were made to the earlier limit of US$10 million in seven of the 22 DRF operations. Hence, the limit was modified to reflect financing needs better.

  6. f. Staff will be allowed more flexibility on advisory fees - particularly in larger and more complex cases. Preparation grants had been capped at US$800,000-900,000, regardless of the size or complexity of the operation and without inflation adjustments. This modification is expected to enhance the ability of participating countries to hire the best qualified financial and legal advisers.

1/ See Debt Reduction Facility for IDA-Only Countries.

Commercial Creditor Litigation against HIPCs

38. Information available to staffs indicate that at least 54 court cases have been filed by commercial creditors against 12 HIPCs over the past decade.33 In most cases, a court award has already been granted, for a total estimated cost of US$1.2 billion (excluding the court awards extinguished through the recent DRF-supported buybacks; see below). The potential impact of such awards varies from less than 0.5 percent of the debtor’s GDP to 49 percent in the case of Liberia. The HIPCs facing the most litigation cases are Liberia, the Republic of Congo, Uganda, and Sierra Leone, with ten, eight, six, and five lawsuits, respectively. The authorities of Liberia, a country that reached the decision point in March 2008 and was covered for the first time by the survey this year, have reported 10 lawsuits, of which two are still in court while judgments have been issued in the other cases. No new case of litigation against HIPCs was reported to have been filed in the past year (Table 5 and Appendix Table 16).34

Table 5.

HIPC Initiative: Commercial Creditor Lawsuits against HIPCs

Status at end-2007 1/

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Source: Survey on Commercial Creditor Participation and Creditor Lawsuits against HIPCs.

Commercial creditors lawsuits against HIPCs are reported without assessing the merits of these disputes. The information reported in this table reflects responses to the survey only, and it should not be considered a complete summary of all commercial creditor proceedings against HIPCs.

Responses were received from 33 countries, including 28 post-decision-point HIPCs and five pre-decision-point HIPCs and by 4 out 7 potentially eligible HIPCs.

HIPCs that did not respond to the survey are shown in bold, and three dots indicate no information.

Judgement was awarded, but in few cases out of court settlements were reached after a court decision was issued.

The authorities did not respond to the survey.

Excludes court awards extinguished trough DRF-supported buyback.

A previously reported lawsuit against São Tomé and Príncipe has been determined to be an official claim against Angola.

The response to the survey 2008 did not include a previously reported case against DRC. The staff has excluded this case until further clarifications are received.

The survey was not sent to Somalia.

Table 16.

Commercial Creditor Lawsuits Against HIPCs 1/

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Source: Survey on Commercial Creditor Participation and Creditor Lawsuits against HIPCs.

Commercial creditors lawsuits against HIPCs are reported without assessing the merits of these disputes. The information reported in this table reflects responses to the survey only, and it should not be considered a complete summary of all commercial creditor proceedings against HIPCs. The survey was responded by the authorities of [27] countries out of 40 surveyed in June 2008. Responses to previous surveys have been included in the table, with the exception of a lawsuit against São Tomé and Príncipe which was determined as official claim against Angola.

Either original creditor or holder of current claim.

When possible, exchange rates at decision-point were used for reporting claims in U.S. dollars. Otherwise, average exchange rates were used.

Excludes accumulated interest, charges, and penalties.

Amount could include interest, charges, and penalties.

Settlement amounts are not reported, as confidentiality agreements might be in place.

Total amount claimed by creditor and court awards exclude cases that have been extinguished through DRF-supported buyback.

The response to the survey 2008 did not include a previously reported case against DRC. The staff has excluded this case until further clarifications are received.

39. Some court judgments against Nicaragua have been settled through the recent DRF-supported buyback. All four litigating creditors of Nicaragua, which had secured court judgments in the order of US$276 million, participated in the buyback operation. These four creditors accepted the proposed discount of principal and interest and took a significant cut in the value of their legal claims. The Nicaragua buyback has extinguished 20 percent of the overall value of reported court judgments against post-decision-point HIPCs, and about 70 percent of such judgments against post-completion-point HIPCs.

40. Active and cooperative negotiation aimed at debt restructuring agreements can be a successful strategy to limit creditor litigation and, where appropriate, should be a HIPC’s first line of defense. The participation of litigating creditors in Nicaragua’s buyback suggests that pressure from the public opinion and a cooperative stance could help moderate litigation. Non-litigating creditors can help too, for instance by agreeing not to sell their claims on HIPCs to creditors unwilling to provide debt relief, as was done in 2007 by Paris Club members and in May 2008 by European Union countries.35

41. The range of instruments to support HIPCs facing litigation has increased. In April 2008, the Executive Board of the African Development Bank approved a proposal to establish the African Legal Support Facility. 36 The Facility would provide (i) technical legal advice to members of the Facility in creditor litigation, and (ii) technical legal assistance to members of the Facility to strengthen their legal expertise and negotiating capacity in matters pertaining to debt management, natural resources and extractive industries management and contracting, investment agreements, and related commercial and business transactions. The Commonwealth Secretariat recently established the HIPC Clinic to provide legal advice to HIPCs that are facing or likely to face debt litigation. The Clinic, which employs a resident legal advisor, aims to support sovereign debtors and assist member countries as well as other non Commonwealth HIPCs, and it intends to hold regional seminars to raise awareness about legal aspects of debt management, legal soundness of loan agreements, debt restructuring, and how to deal with litigation threats.37

C. Ensuring Financing of the HIPC Initiative

42. For the World Bank, the HIPC Debt Initiative Trust Fund facilitates the fulfillment of commitments of multilateral creditors, including eligible regional and sub-regional creditors, to provide HIPC Initiative debt relief. To date, donors have pledged close to US$4.0 billion to the HIPC Trust Fund to support these creditors, and have contributed more than US$3.7 billion in the form of cash and promissory notes. The HIPC Trust Fund has reimbursed close to US$2.8 billion towards the cost of debt relief to IDA out of allocations from IBRD’s net income and creditor-specific contributions made by donors to the HIPC Trust Fund.38 Disbursements from the HIPC Trust Fund to eligible regional and sub-regional creditors now total more than US$2.8 billion.39

43. Mobilizing additional resources to finance debt relief to all remaining HIPCs may, however, pose challenges to the Fund. Resources available in the PRGF-HIPC Trust are currently insufficient to finance the cost of debt relief to all pre-decision point HIPCs (to whom such resources are available on a first-come, first-served basis). This is because the cost of debt relief to Sudan and Somalia, as well as to other countries that entered the Initiative after 2006, were not included in the original financing framework.40 Should these two countries progress to the decision point, mobilizing resources would become an urgent task, and as demonstrated in the case of Liberia, could be challenging.41

V. Debt Outlook in Post-Completion-Point Countries

A. Overview

44. Debt relief provided to post-completion-point countries is expected to reduce their external debt stock by more than 90 percent in end-2007 NPV terms (Figure 5). Most of this reduction (76 percent) would be delivered in the context of the HIPC Initiative and the MDRI. The remainder is attributable to traditional debt relief and voluntary bilateral debt relief beyond HIPC. Debt stocks in the 10 interim period countries are expected to decline by a similar factor.

Figure 5.
Figure 5.

Post-Decision Point HIPCs’ Debt Stock under Different Debt Relief Stages

(In billions of U.S. dollars, in end-2007 NPV terms)

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

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

45. Debt sustainability analyses (DSAs) performed under the Debt Sustainability Framework (DSF) provide a comprehensive view of the debt outlook of post-completion-point countries. Their forward-looking nature allows for a nuanced assessment of risks that goes beyond the consideration of current debt ratios. The remainder of this section analyzes the information contained in DSAs conducted so far on these countries.

46. DSAs confirm that post-completion-point countries are in a better debt situation than other HIPCs, and also than non-HIPCs. At end-2007, the NPV of the debt-to-export ratio for post-completion-point HIPCs averaged 63 percent. This contrasts with an average of 200 percent for pre-completion-point HIPCs.42 Reflecting their heavier debt burden, all but one pre-completion-point HIPC have been assessed either to be in debt distress or to have a high risk of debt distress, while most post-completion-point countries have a low or moderate risk rating (Figure 6). The distribution of risk ratings is also better for post-completion-point countries than for non-HIPC LICs. The better rating distribution reflects both lower debt ratios—a direct outcome of debt relief—and the fact that post-completion-point countries tend to have, on average, better policies and institutions than other HIPCs and, to a lesser extent, non-HIPCs, as measured by the CPIA rating. Better policies and institutions lead to a higher capacity to carry debt and translates, in the DSF, in higher indicative thresholds.

Figure 6.
Figure 6.

Dispersion of the NPV of Debt-to-Exports Ratio and Risk of Debt Distress in Low Income Countries

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

Sources: Latest joint Bank/Fund DSAs available for LICs.Note: Based on the actual/projected NPV of debt-to-exports ratio under the baseline scenario.

47. However, long-term debt sustainability remains a challenge in many post-completion-point countries. Despite the significant decline of debt burdens thanks to debt relief, only nine post-completion-point HIPCs (or about 40 percent) have a low risk of debt distress according to the most recent DSAs. In addition, the distribution of ratings has deteriorated since last year (Figure 7), with the number of countries with a high risk rating increasing from one to four. A new DSA for Rwanda confirmed the high risk rating of the previous DSA. New DSAs for Burkina Faso and São Tomé and Principe changed these countries’ risk ratings from moderate to high. Finally, The Gambia, which reached the completion point in December 2007, was assessed at that time as having a high risk of debt distress.

Figure 7.
Figure 7.

Risk of Debt Distress Ratings of Post-Completion-Point Countries

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

Sources: Latest joint Bank/Fund DSAs available for post-completion point HIPCs

48. The four high-risk countries share a number of vulnerabilities. A close look at the individual DSAs shows that the high risk ratings are generally associated with a limited capacity to carry debt due to: (i) a low export base, concentrated in a few commodities, and therefore also highly susceptible and sensitive to shocks (e.g., droughts and price volatility); and (ii) a poor, or deteriorating, quality of policies and institutions as measured by the CPIA index (Box 4).

High Risk of Debt Distress in Post-Completion-Point HIPCs

As of end-June 2008, Burkina Faso, The Gambia, Rwanda, and São Tomé and Príncipe had a high risk of debt distress. With the exception of The Gambia, all these countries were granted topping-up assistance at the completion point. Debt relief at the completion point is expected to reduce the 2007 NPV of debt-to-exports ratio of these countries to levels below (Burkina Faso and Rwanda) or close to (São Tomé and Príncipe and The Gambia) the relevant indicative threshold. However, DSAs show that these countries’ debt situation remain highly vulnerable.

NPV of debt-to-exports ratio

(in percent)

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The decrease in the ratio for Sao Tome and Principe in 2017 relates to the start of oil production projected for 2014.

Export value growth at historical average minus one standard deviation in the second and third projection year.

This reflects structural weaknesses and/or weak macroeconomic management. In particular:

  • A narrow export base is often a key factor leading to high risk ratings. The share of the top three commodities in the total exports of goods in these countries in 2006 was 80 percent on average, way above that of other post-completion point countries and PRGF-eligible IDA-only non-HIPCs (about 62 percent).1/,2/ This very high concentration means a higher vulnerability to export shocks, which are frequent in these countries. For instance, in the case of São Tomé and Príncipe, the reclassification from a moderate to a high risk of debt distress derives mainly from revisions to the timing and levels of oil production. In addition, both São Tomé and Príncipe and Rwanda have very low export bases (less than 10 percent of GDP in 2007), which means that their capacity to carry debt (based on the NPV of debt to export ratio) is very limited.

  • The quality of policies and institutions also plays an important role. The Gambia and São Tomé and Príncipe are classified as weak performers according to the World Bank’s CPIA. Weak policies and institutions mean a lower capacity to carry debt, which is operationalized in the DSF by lower indicative thresholds. Poor policies in the interim period have contributed to The Gambia’s high risk rating. The Gambia did not receive topping-up assistance at the completion point, despite an NPV of debt to export ratio way above the HIPC Initiative threshold of 150 percent. This is because this high ratio mostly reflected inappropriate policies during the earlier part of the interim period which affected negatively export volumes and led to excessive external borrowing.3/ Burkina Faso, previously a strong performer, has been reclassified as a medium performer following a decline of its CPIA rating in 2006 and 2007. The reclassification has led to a lowering of indicative thresholds and contributed to the downgrade of Burkina Faso’s risk rating.

1/ Estimates based on data from the UN-Comtrade Database2/ The actual shares were 88 percent for Burkina Faso, 87 percent for Rwanda, 82 percent for São Tomé and Príncipe and 65 percent for The Gambia.3/ See The Gambia: Enhanced HIPC Initiative—Completion Point Document andMDRI, IMF Country Report No. 08/109, March 2008 and World Bank Report No. 41413-GM, December 2007.

49. DSAs show that most post-completion-point HIPCs share, to various extents, a vulnerability to export shocks.43 With the exception of two high-risk countries, the NPV of external debt to exports ratio is below its relevant threshold in 2007 in post-completion-point countries. In contrast, the projections under the most extreme stress tests in each DSA, which involves in most cases a shock to exports,44 show a large increase in the ratio after 10 years (Figure 8). In low-risk countries, which have on average lower initial debt ratios and a higher capacity to carry debt thanks to better policies and institutions, the external debt ratio, although much higher after the shock, remains at manageable levels. For moderate-risk countries, the increase is on average much larger and brings the ratio above the indicative thresholds, in light of a lower capacity to carry debt.45 The dispersion of outcomes is also much larger than for low-risk countries. These developments are magnified in the case of high-risk countries.

Figure 8.
Figure 8.

Distribution of the NPV of debt-to-exports ratio in post completion point HIPCs

Citation: Policy Papers 2008, 071; 10.5089/9781498334174.007.A001

Sources: Latest joint Bank/Fund DSAs available for post-completion point HIPCsNote: 2007 figures refer to the baseline scenario and 2017 figures to the most extreme test.

50. DSAs also show that post-completion-point countries’ debt outlook is highly sensitive to the terms of new financing. To help borrowers and lenders in their decisionmaking, the DSF includes a standard alternative scenario that assumes less favorable terms for new borrowing.46 In about 60 percent of DSAs for post-completion-point HIPCs, this alternative scenario leads the NPV of external debt-to-exports ratio beyond its threshold, compared to 30 percent for non-HIPCs. This result confirms that these countries should approach nonconcessional financing with caution.

B. The Fund and the Bank’s Efforts to Foster Debt Sustainability

51. The above results highlight the need for post-completion-point HIPCs to implement sound borrowing policies and strengthen their capacity in public debt management. Considering the improved macroeconomic and financial outlook of some low-risk post-completion-point HIPCs, their attractiveness for private and nontraditional official creditors has risen. While welcome, given the extent of development needs, this situation raises additional risks for debt sustainability.

52. In 2006 and 2007, some HIPCs have borrowed non-concessionally to finance public investments. Ghana, Mali, Mauritania, Rwanda (all post-completion point) and the Democratic Republic of Congo (a resource rich interim country) have contracted substantial external debt at terms exceeding the concessional element established under the IDA Non-Concessional Borrowing Policy.47 IDA policy helps grant-eligible and MDRI recipient countries avoid the re-accumulation of unsustainable debt while enabling them to gradually access additional financing when country and loan specific factors indicate that non-concessional borrowing is justified to meet development needs.

53. The Bank and the Fund have increased their efforts to foster debt sustainability. A key step was the introduction in 2005 of the DSF. But the DSF’s effectiveness depends on both borrowers and lenders acting in broad harmony with it. For this reason, the Bank and the Fund have increased their outreach efforts on the DSF with nearly all major multilateral and bilateral creditors to LICs. Outreach opportunities to commercial creditors have been pursued as well. In addition, mailboxes to answer specific questions on DSF issues have been created.48 As a result of these efforts, an increasing number of creditors are referring to the DSF to base their financing decisions, including: the AfDB, the IaDB, the AsDB and IFAD, which now have financing rules similar to IDA’s, where the terms of financing to LICs are related to the conclusions of DSAs; and OECD export credit agencies, which adopted in January 2008 a set of lending principles that adhere to IDA and IMF concessionality requirements and refer explicitly to the DSF.49 These principles have been officially endorsed by European Union countries.50

54. On the debtor side, the Bank and the Fund, in partnership with regional capacity building institutions, have organized training workshops on the DSF.51 Since 2005, eight workshops have been organized in Africa, Asia, and Latin America, which were attended by country officials from all post-completion-point HIPCs (and LICs across all the regions). The Fund’s West AFRITAC also organized workshops on the DSF at the national level in five countries, at the request of the authorities.

55. The Bank and the Fund have also scaled up their work program to help improve debt management in LICs. The Bank and Fund’s additional work program has two components: 52

  • The Debt Management Performance Assessment (DeMPA) tool. DeMPA is a methodology developed by the Bank for identifying strengths and weaknesses in debt management operations. 53 As of end-June 2008, 18 DeMPA assessments (including five pilot assessments) have been undertaken. The DeMPA tool and a guide to using the tool have been posted on the Bank’s external website. Training events (two so far) provided in-depth understanding of the rationale, scope, coverage, and application of the DeMPA tool; along with an overview of the new trends and challenges in debt management in developing countries.

  • Technical assistance in designing Medium-Term Debt Management Strategies (MTDS). An MTDS complements the DSA. It helps to operationalize a country’s debt management objectives by outlining cost-risk tradeoffs in meeting the government’s financing needs and payment obligations. Bank and Fund staffs have designed a toolkit, including a guidance note on the process of designing and implementing an MTDS, a template for strategy documentation, and a preliminary version of the cost-risk analysis tool (closely linked to the DSF). This toolkit has been field-tested in Bangladesh, Cameroon, Ghana, and Nicaragua and additional field tests will be carried out this calendar year.

56. Continued sustained efforts will be required to support pre- and post-completion-point countries, and LICs more generally, in their efforts to achieve or maintain debt sustainability. First, debtor-reported information, which is the main source of data for DSAs, remains weak in many LICs. Improving the reliability, comprehensiveness and timeliness of debtor information will likely take time and external support. Meanwhile, creditor data can help fill the information gap, and enhanced data sharing will be important. Second, the rapidly expanding number of creditors to LICs and the lack of information on associated amounts and terms of financing increases the risk of excessive debt accumulation. Thus, continued outreach efforts to creditors and debtors to promote appropriate lending and borrowing decisions and information sharing are needed. Third, significant training and technical assistance will continue to be required in the area of debt sustainability and management. Finally, debt sustainability depends not only upon a country’s level of debt or sound debt management, but also upon enhancing its repayment capacity. This ultimately requires sound growth-enhancing policies.

Annex I. Enhanced HIPC Initiative: Implementation Status by Country (As of end-July 2008)

A. Pre-Decision-Point Countries


Recent Political Developments: The Union army backed by an African Union force removed Colonel Bacar from power in Anjouan, which had broken from the Union of Comoros. Anjouan was fully integrated into the fold of the Union of Comoros, following the election of the new island president in June 2008. Interisland cooperation can now be restored, ending the political crisis and opening the way for a resumption of support from donors and the IFIs. However, political risks will remain significant.

PRSP Status: An I-PRSP endorsed by the government was presented to the Boards of IDA and IMF alongside a JSAN on May 16, 2006. As noted in the JSAN, the I-PRSP and related action plan are more comprehensive than is usually expected, and they contain