Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) - Status of Implementation 2009

This paper updates the status of implementation, impact, and costs of the Enhanced Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Debt relief provided under the Initiatives has substantially alleviated debt burdens in recipient countries. Aided by continued flexibility on the part of IDA and the Fund, substantial progress has been achieved under the Initiatives since the last report, and a number of post-decision-point countries have already benefited from debt relief.

Abstract

This paper updates the status of implementation, impact, and costs of the Enhanced Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Debt relief provided under the Initiatives has substantially alleviated debt burdens in recipient countries. Aided by continued flexibility on the part of IDA and the Fund, substantial progress has been achieved under the Initiatives since the last report, and a number of post-decision-point countries have already benefited from debt relief.

I. Introduction 2

1. This report reviews the implementation of the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Section II reports on the progress made in the implementation of both initiatives since the publication of the 2008 Status of Implementation report,3 while Section III updates the estimated costs of debt relief. Section IV discusses the main remaining challenges and Section V reviews the debt sustainability outlook of HIPCs in light of the global financial and economic crisis.

II. Progress in the Implementation of the HIPC Initiative and MDRI

2. Significant progress has been made in the past year, with five countries reaching key milestones:

  • Reached Completion-point: Burundi (January 2009), Central African Republic and Haiti (June 2009) have reached their respective completion points and qualified for irrevocable debt relief.

  • Reached Decision-point: Togo (November 2008) and Côte d’Ivoire (March 2009) have reached their respective decision points and begun receiving interim debt relief.

  • A total of 35 countries (out of 40)4 are now past their decision point, of which 26 are past their completion point (Table 1).

Table 1.

List of Heavily Indebted Poor Countries (as of end-July 2009)

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

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 or MDRI.

In February 2009, the Nepalese authorities communicated to IDA and the IMF that Nepal had decided not to avail itself of debt relief under the HIPC Initiative. Accordingly, Nepal has been removed from the list.

The Kyrgyz authorities indicated in early 2007 that they did not wish to avail themselves of debt relief under the HIPC Initiative but subsequently expressed interest in the MDRI. Based on the latest available data, however, indebtedness indicators were estimated to be below the applicable HIPC Initiative thresholds, while income levels were estimated to be above the IMF MDRI thresholds.

3. While preserving the core principles of the HIPC initiative, IDA and the IMF have continued to make use of the flexibility available in the framework.5 This has allowed HIPCs to receive early debt relief by taking into account individual country situations.

  • Pre-decision-point arrears clearance operations: Major multilateral creditors, including the African Development Bank (AfDB) and IDA, provided grants in support of arrears clearance operations for Togo and Côte d’Ivoire, which facilitated their reaching the decision point.6 In both countries, early (i.e. pre-decision point) clearance of arrears was made possible by the HIPC Initiative’s provision that allows the grant element of the clearance of arrears to count towards HIPC Initiative debt relief.

  • Establishment of a track record of reforms and economic stability: Côte d’Ivoire, after emerging from years of civil conflict with significantly weakened institutional and administrative capacity, was able to build a track record towards the decision point with the implementation of programs supported by two consecutive Emergency Post-Conflict Assistance (EPCA) purchases.

  • Progress towards completion-point triggers: Judgment has continued to be used in this area. In the cases of Burundi and Haiti, while some triggers had been only partially implemented, the Boards decided that sufficient progress had been made towards the underlying objectives.

  • Preparation and implementation of poverty reduction strategies: Togo reached the decision point on the basis of an Interim-Poverty Reduction Strategy Paper (I-PRSP). In a country with limited administrative capacity, debt relief could have been significantly delayed had a full PRSP been required.

4. Debt relief provided under the Initiatives has substantially alleviated debt burdens in recipient countries. The overall assistance committed to the 35 post-decision-point HIPCs under the Initiatives represents on average about 407 percent of these countries’ 2008 GDP.8 The debt burden for these countries is expected to be reduced by about 80 percent, compared to pre-decision-point levels, owing to this debt relief, together with relief under traditional mechanisms and additional (“beyond HIPC”) relief from Paris Club creditors (Figure 1).

Figure 1.
Figure 1.

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

(In billions of U.S. dollars, in end-2008 NPV terms)

Citation: Policy Papers 2009, 068; 10.5089/9781498335461.007.A001

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

5. Beyond debt relief, IDA and the IMF are providing other forms of assistance to help countries maintain debt sustainability Specifically, such assistance has taken the following forms:

  • Scaling up of debt management technical assistance to Low-Income Countries (LICs) and IDA-only countries through the Debt Management Facility (DMF).9 As of end-July 2009, Debt Management Performance Assessments (DeMPAs)10 were carried out in 33 countries, including 21 HIPCs. These assessments will help country authorities identify areas where technical assistance might be required to achieve a satisfactory level of capacity. Technical assistance in implementing the Medium-Term Debt Strategy (MTDS) toolkit11 has been provided to six countries since the last Status of Implementation report.

  • Efforts to promote the use of the Debt Sustainability Framework (DSF) are also continuing12. The Fund and the Bank have continued DSF outreach activities by organizing three workshops for country authorities from low-income countries, including HIPCs. Since 2006, outreach efforts have been successful in enhancing coordination among creditors13 and promoting better understanding of the DSF among debtors as a guide for their borrowing decisions. In addition, IDA’s non-concessional borrowing policy (NCBP) stresses the importance of sound debt management, improved debt reporting, and, if warranted by debt sustainability concerns, a reduction in the volume of IDA financing and adjustment to IDA lending terms. 14

6. Concomitant with progress under the Initiative, HIPCs were able to increase their poverty reducing expenditure. For the 35 post-decision-point HIPCs, poverty reducing expenditure between 2001 and 2008 increased by 2 percentage points of GDP, on average, while debt service obligations declined by the same order of magnitude (Figure 2, and Table 1 in the Appendix).

Figure 2:
Figure 2:

Average Debt Service and Poverty Reducing Expenditures1/

Citation: Policy Papers 2009, 068; 10.5089/9781498335461.007.A001

Sources: HIPC documents; and IMF staff estimates.1/ Prior to 2008, figures represent debt-service paid, and thereafter, debt-service figures are projected. For detailed country data refer to Appendix Table 2.

7. Despite these positive developments, post-completion-point HIPCs have made uneven progress towards meeting their MDGs. With the exception of improvements in primary education and ensuring gender equality, more than half of post-completion-point HIPCs are unlikely to meet their MDGs (See Table 3 in Annex I).15 Progress has been slowest in fragile states, which present difficult political and governance challenges for effective delivery of development finance and services.16

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

8. The total cost of HIPC Initiative debt relief to creditors is estimated at US$74 billion in end-2008 NPV terms (Table 2). More than half of the cost, or US$39 billion, represents irrevocable debt relief to the 26 post-completion-point countries. The cost for the 9 interim countries amounts to US$19 billion, an increase of around 9 percent from last year. This is mainly on account of Côte d’Ivoire, whose estimated cost of HIPC Initiative relief amounted to US$3 billion in end-2008 NPV terms. The cost of HIPC Initiative debt relief to the remaining five pre-decision-point HIPCs is estimated at US$17 billion, most of which is accounted for by two countries—Sudan and Somalia. Topping-up assistance (provided so far to six HIPCs) represents less than 3 percent of the total HIPC Initiative cost.17

Table 2.

HIPC Initiative: Costs by Main Creditor and Country Group

(In billions of U.S. dollars, in end-2008 NPV terms, unless otherwise indicated)

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

Total cos ts as reported in Table 2 of “HIPC Initiative and MDRI: Status of Implementation , September 2008 “, discounted to end -2008 terms. Cost calculations exclude Nepal.

Since August 2008, Burundi, the Central African Republic, and Haiti reached completion point; Togo and Cote d’Ivoire reached the decision point; Nepalese authorities communicated to ID A and t he IMF that Nepal had decided not to avail itself of debt relief under the HIPC Initiative.

9. Multilateral (45 percent) and Paris Club (36 percent) creditors bear the largest shares of the total cost of the HIPC Initiative (Table 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 (55 percent) than for interim countries (36 percent) or pre-decision-point countries (32 percent). Looking ahead, Paris Club creditors will be called upon to deliver a larger share of relief to interim countries, estimated at 47 percent, compared to about one-third for post-completion-point and pre-decision-point countries. For non-Paris Club and commercial creditors, their share of total costs is estimated to be highest in pre-decision-point countries (34 percent) (Table 3).

Table 3.

MDRI Costs by Creditor and Country Group

(In billions of U.S. dollars and in end-2008 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 various 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 at the time of the debt relief (EBS/05/158 Revision 1, 12/1)

IMF MDRI assistance to Cambodia and Tajikistan.

Includes IMF MDRI assistance to Burundi and Central African Republic.

10. With respect to MDRI, the total cost to the four participating creditors is estimated at US$29 billion in end-2008 NPV terms. About 85 percent has already been delivered to the 26 post-completion-point countries (Table 3), and two non-HIPCs (Cambodia and Tajikistan) by the IMF. Two thirds of the total estimated MDRI cost will be borne by IDA, with the share of the IMF, AfDF and IaDB amounting to 15, 13, and 8 percent, respectively (Figure 3).

Figure 3.
Figure 3.

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

(In end-2008 NPV terms, unless otherwise indicated)

Citation: Policy Papers 2009, 068; 10.5089/9781498335461.007.A001

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

IV. Remaining Challenges

11. While recent progress under the Initiatives has been encouraging, three important challenges remain to be met to fulfill the objectives of the Initiatives.

A. Taking Remaining Countries through the HIPC Initiative Process

12. Many of the pre-completion-point countries have suffered from common challenges related to preserving peace and stability, improving governance, and delivering basic services that have undermined their economic development.18 Addressing their debt-related vulnerabilities through the HIPC Initiative and MDRI relief will be an important step to overcome their development challenges.19

13. A number of countries are well placed to make significant progress under the Initiative during the next 12–18 months (Annex I).

  • Interim countries at an advanced stage: Afghanistan, Liberia, and the Republic of Congo are well placed to reach their completion points—their Poverty Reduction and Growth Facility (PRGF) supported programs are on track, they have developed and implemented poverty reduction strategies for at least one year, and have made significant progress in implementing their floating completion-point triggers.

  • Interim countries at a less advanced stage: Togo and Côte d’Ivoire are at earlier stages of implementation of their completion-point triggers, and are also making progress as their PRGF-supported programs are on track.

  • Pre-decision-point countries: Comoros’ request for a PRGF-supported program is expected to be considered by the Executive Board of the Fund by end-September.20 Successful implementation of the program should lay the basis for reaching the decision point in the first half of 2010.

14. The remaining interim countries have been at that stage longer than any others (Figure 4). This is in contrast to the relatively short interim periods in countries that reached the completion point within the past 12 months, and points to the challenges ahead in sustaining progress under the Initiatives.

Figure 4.
Figure 4.

Duration of the Interim Period under the HIPC Initiative

(in years)

Citation: Policy Papers 2009, 068; 10.5089/9781498335461.007.A001

Sources: HIPCs decision and completion point documents.

15. Nonetheless, in some of these countries, the prospects for progress under the Initiatives have recently improved.

  • Guinea-Bissau experienced many years of conflict, but has since implemented a program with the IMF supported by EPCA purchases that could pave the way for a PRGF arrangement in the future. The PRSP’s annual progress report is expected by end-2009.

  • The Democratic Republic of Congo (DRC), which underwent years of internal conflict, is at an advanced stage in its discussions with the IMF on a PRGF-supported program. A final agreement may be reached in the coming months once pending issues related to large nonconcessional borrowing are resolved.

  • In Chad, years of conflict and political instability, together with external financing from oil revenues, contributed to slow progress towards the completion point. However, following the decline in oil prices and emerging budgetary pressures, agreement was reached on a IMF staff-monitored program (SMP) covering April-October 2009 which, with suitable implementation of the SMP, may be followed by a PRGF arrangement.

16. The main obstacles to the remaining countries’ progress under the HIPC Initiative continue to be primarily of a political and/or security nature.

  • Guinea, which had implemented most of its completion-point triggers, suffered a setback after a military coup in December 2008. The new regime does not currently enjoy broad international recognition. This has led to the suspension of discussions for the finalization of the second review of the PRGF-supported program and of the HIPC completion point, and several key financial assistance programs from other major development partners have been suspended.21

  • Somalia and Sudan, afflicted by internal division and conflict, have protracted arrears to multilateral institutions. They will need to mobilize resources to clear their arrears prior to reaching their decision point.22 Mobilizing such resources will be challenging, given the size of arrears.

  • Eritrea’s authorities indicated in 2008 discussions that they would consider seeking HIPC Initiative assistance once the security situation improves.

17. The Kyrgyz Republic has not expressed a willingness to avail itself of debt relief under the HIPC Initiative. Based on the latest available data, however, debt indicators were estimated to be below the applicable HIPC Initiative thresholds.

B. Ensuring the Full Participation of All Creditors

18. It is critical that all creditors deliver their share of debt relief to significantly alleviate the debt burdens of the remaining HIPCs. This is consistent with the objective of the Initiative to share equitably the burden of relief among all creditors. Large multilateral and Paris Club creditors have provided their full share of debt relief. Accordingly, the discussion below focuses on other creditors.

Small Multilateral Creditors

19. Nearly all multilateral creditors have committed to delivering HIPC Initiative debt relief at completion point. In addition to the largest four creditors23 (Table 3), another 20 multilateral creditors, accounting for 14 percent of total HIPC assistance costs, have committed to deliver debt relief to all HIPCs at completion point.24 Six of these creditors also provide debt relief in the interim period through debt service reduction or rescheduling of arrears and maturities falling due.25 However, another eight multilateral creditors, representing less than 0.5 percent of estimated HIPCs costs, have not yet indicated their intention to provide relief under the HIPC Initiative. 26

20. Efforts at monitoring debt relief provided by smaller multilateral creditors are ongoing. A survey carried out in 2009 by the World Bank, to which seven of the smaller multilateral creditors27 responded, indicates that such creditors have delivered half or more of their committed debt relief to completion-point countries. Staffs are working with their counterparts in the remaining multilateral development banks (MDBs), representing HIPC costs amounting to about 5 percent of the total committed to post-completion-point HIPCs, to increase responses and institutionalize the tracking mechanism.

Non-Paris Club Official Bilateral Creditors

21. Progress in the delivery of debt relief by non-Paris Club bilateral creditors has been limited since last year’s report. 28 The share of HIPC Initiative debt relief delivered by these creditors, which represents about 13 percent of the total cost, remains low, at around 35–40 percent (Appendix Table 15). Major developments include the cancellation of claims by Algeria on the Central African Republic and the provision of its full share of debt relief to Nicaragua; China’s delivery of debt relief to Burundi and the Central African Republic;29 and the full provision of debt relief by Oman to Senegal, and by Portugal to São Tomé and Príncipe.

Commercial Creditors

22. Commercial creditors account for 6 percent of the total cost of debt relief to be provided to the 35 post-decision-point HIPCs. Commercial creditors’ share of the cost estimates of debt relief to be provided to post-decision-point-HIPCs has been increasing primarily because those creditors account for over 30 percent of total HIPC debt relief to Côte d’Ivoire.

23. Commercial creditors have improved their overall provision of debt relief through significant debt relief provided to Côte d’Ivoire and Liberia. London Club creditors, accounting for nearly one-third of total HIPC assistance to Côte d’Ivoire, have already provided their expected debt relief through a rescheduling agreement signed in 1998.30 In April 2009, commercial creditors provided full debt relief to Liberia under a debt buyback operation supported by the Debt Reduction Facility (DRF) of IDA and contributions from bilateral donors, which helped extinguish US$1.2 billion of commercial debt at a deep discount (97 percent of face value).

24. Litigation by commercial creditors, which had been an impediment to the delivery of full debt relief to HIPCs, appears to be less of a problem now, according to information provided by HIPCs’ authorities.31 Early engagement with commercial creditors, including through DRF operations, helped reduce the number of outstanding litigation cases against HIPCs from 33 to 14 cases over the past year.32 This large reduction in litigations mostly reflects the impact of recent DRF operations in Nicaragua and Liberia, as well as out-of-court settlements by Cameroon, the Republic of Congo, Sierra Leone and Zambia. 33 Furthermore, a joint litigation by five creditors against Nicaragua was dropped.

25. While recent developments are encouraging, the threat of new litigation remains. New lawsuits have been initiated last year against the DRC, Sierra Leone, Sudan and Zambia. DRF operations under preparation, including those for the DRC and Sierra Leone, may help reach a settlement agreement to the extent that the litigating creditors participate in the buyback operations. Additional support for HIPCs facing litigation will be available from the African Legal Support Facility34 which was formally launched by the African Development Bank on June 29, 2009.

26. Initiatives are underway in some donor countries to introduce legislation curtailing the scope of litigation against HIPCs. In both the United States and the United Kingdom, options are being considered to introduce legislation to limit non-participating creditors’ ability to seek awards from HIPCs via the courts in the U.S. and U.K. To this end, the U.K. Government has launched a consultation on legislation that would limit the proportion of debts previously contracted by a HIPC that a creditor could reclaim under U.K. law.35 The U.S. Congress is considering similar proposals.36 In May 2008, a law to this effect was also introduced in Belgium.37

C. Ensuring Financing of the HIPC Initiative and MDRI

27. At the World Bank, the Debt Relief Trust Fund (DRTF) and IDA are sufficiently resourced to cover debt relief costs under the HIPC Initiative over the IDA15 commitment period (FY09–11). Based on current commitments, it is expected that future IDA replenishments would include sufficient resources to finance IDA’s cost of debt relief under the Initiatives.

  • The DRTF, in addition to supporting the regional and multilateral creditors in providing HIPC debt relief to eligible HIPCs, may utilize received donor contributions for arrears clearance operations of IDA, as well as possible contributions from IBRD net income to meet any remaining structural gap in the MDRI financing framework.38 To mid July 2009, donors have pledged close to US$4 billion to the DRTF to support the eligible regional and sub-regional creditors, and have contributed more than US$3.8 billion in the form of cash and promissory notes (See Appendix table 10). 39 The Trust Fund has disbursed more than US$2.8 billion to these creditors to support their provision of debt relief to eligible HIPCs.40

  • IDA resources to finance debt relief under the Initiatives for the IDA 15 commitment period (FY09–11) include donor contributions amounting to SDR 1.1 billion for HIPC relief and SDR 4.1 billion for debt forgiveness under the MDRI. In IDA 15, donors also committed SDR 0.9 billion to finance the full cost of arrears clearance by eligible countries to IDA and the IBRD through the DRTF.41

28. For the IMF, available resources are estimated to be sufficient to cover the projected cost of debt relief to all the remaining HIPCs, except the protracted arrears cases of Somalia and Sudan. Because there was no provision for debt relief to Somalia and Sudan under the original HIPC/MDRI financing framework, additional resources would be needed when these countries are ready to embark on the HIPC Initiative (see paragraph 8 above). Additional resources would also need to be mobilized to finance debt relief to any new countries that may be found eligible for the HIPC Initiative and the MDRI.

V. Debt Sustainability

29. Debt relief provided under the Initiatives has considerably reduced debt vulnerabilities in post-completion-point countries. Debt vulnerabilities in post-completion-point HIPCs—as measured by the distribution of Debt Sustainability Framework (DSF, Box 1) risk ratings—are on average much lower than in pre-completion-point HIPCs. The comparison with non-HIPCs is also favorable (Table 4). However, a few post-completion-point countries remain vulnerable to debt-related problems. Five are still characterized as being at a high risk of debt distress.42 It should be noted that these risk ratings are based on the most recent DSAs endorsed by the Boards which have generally been undertaken during the last year. For many such DSAs, the underlying macroeconomic framework may not fully reflect the adverse impacts of the ongoing global financial crisis.

Debt Sustainability Framework

The objective of the joint Fund-Bank debt sustainability framework (DSF), which was introduced in 2005, is to support low-income countries (LICs) in their efforts to achieve their development goals without creating future debt problems.1

The debt sustainability analysis (DSA) under the DSF focuses on five debt burden indicators in order to assess the risk of external public debt distress, namely: (i) present value (PV) of debt-to-GDP; (ii) PV of debt-to-exports; (iii) PV of debt-to-revenues; (iv) debt service-to-revenues; and (v) debt service-to-exports.

A risk of debt distress rating is derived by reviewing the evolution of debt burden indicators compared to their indicative policy-dependant debt-burden thresholds under a baseline scenario, alternative scenarios and stress tests. Countries can be classified as: (i) low risk; (ii) moderate risk; (iii) high risk; or (iv) in debt distress.

The thresholds depend on a country’s quality of policies and institutions as measured by the three-year average of the Country Policy and Institutional Assessment (CPIA) index, compiled annually by the World Bank. 2

1 See “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries, IMF/The World Bank, 2008.2 The indicative policy-dependant thresholds correspond to probabilities of debt distress ranging between 18 and 22 percent for CPIA ratings of 3.25, 3.5 and 3.75 (the benchmarks set for weak, moderate and strong performers, respectively).
Table 4.

Distribution of risk of debt distress by country groupings1

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Based on debt sustainability analyses available as of end-July 2009.

Excludes 8 PRGF-eligible countries (Azerbaijan, India, Kiribati, Maldives, Pakistan, Somalia, Timor Leste and Uzbekistan), for which LIC DSAs are unavailable or were not produced because countries had significant market access.

Excludes Somalia, as no DSA is available.

30. Recent global developments pose additional challenges for all HIPCs, including post-completion-point countries. In particular, the global economic downturn is expected to have a strong negative effect on low-income countries through exports, FDI, remittances and (possibly) aid flows. The adverse impact on economic activity and government revenues is expected to lead to increased budgetary and external financing gaps in many countries.43 As a result, it is anticipated that debt burden indicators in all LICs will deteriorate, although the magnitude of the deterioration will depend on the persistence of the downturn and the degree of macroeconomic adjustment.

31. Staffs have analyzed the impact of the crisis on debt vulnerabilities in HIPCs using a two-pronged approach.

  • Where a member’s DSA was issued to the Boards recently (i.e., after end-May 2009), the analysis is based on the DSA. 44

  • In all other cases, the impact of the crisis on debt vulnerabilities is simulated by updating the most recent DSA using the macroeconomic projections contained in the August WEO submission (see Box 2).45

32. The criteria used in the simulations to define the impact of the crisis on countries’ debt vulnerabilities depend on their initial risk ratings.

  • Countries presently rated to be at low or moderate risk of external debt distress are judged to be vulnerable to adverse debt developments if the analysis indicates the possibility of a rating downgrade. However, such developments signal a deterioration in the long-term debt outlook of these countries, rather than an impending debt crisis.

  • For high-risk countries, a different yardstick needs to be used to identify countries most vulnerable to the crisis from a debt sustainability perspective. Specifically, such countries are deemed to be more vulnerable if at least two debt burden indicators experience a large and sustained breach of their DSF thresholds. Such developments in high-risk countries may point to more severe and pressing debt-related problems.

33. Overall, the crisis is expected to have a significant impact on key macroeconomic aggregates in HIPCs. A comparison of the macroeconomic projections in recent DSAs and in the August WEO submission with the projections in older DSAs indicates, on average, a downward revision of nominal GDP by about 7 percent, exports by about 9 percent, and government revenue by 12 percent.

34. The staffs’ analysis of the impact of the crisis does not suggest a risk of a major debt crisis in HIPCs, but points to an increase in debt vulnerabilities for a number of countries.46, 47

  • High-risk countries: Afghanistan, an interim HIPC, is likely to experience a large increase in its debt burden indicators.

  • Moderate-risk countries: Five post-completion-point HIPCs could face increased debt vulnerabilities: Ethiopia, Malawi, Mauritania, Nicaragua, and Sierra Leone. For Ethiopia, Mauritania and Nicaragua the breach of DSA thresholds under the updated scenarios are temporary and/or limited.

  • Low-risk countries: Mali, a post-completion-point country, could also face increased debt vulnerabilities. Nonetheless, while more vulnerable now, Mali’s debt-related problems do not appear to be serious.

35. High debt vulnerabilities in post-completion-point countries pose more serious problems than in pre-decision-point and interim countries. For pre-decision-point countries, HIPC debt relief can be tailored to their specific circumstances, while HIPC debt relief committed at the decision-point to interim countries may be topped-up if the deterioration in debt indicators results from shocks beyond the country’s control. In contrast, these mechanisms are no longer available to address a deterioration in the debt outlook for post-completion-point countries.

36. These results have a number of important policy implications.

  • Close monitoring of debt developments in high-risk post-completion countries will be needed to safeguard debt sustainability, and countries at higher risk will need to adopt particularly prudent fiscal and borrowing policies to reduce debt-related vulnerabilities.

  • Donors and official creditors will need to provide HIPCs with highly concessional resources in order to maintain debt sustainability and avoid excessive adjustment in the more vulnerable countries. At the same time, tighter fiscal constraints in donor and creditor countries raise concerns over the availability of additional highly concessional resources.48 The lack of adequate concessional resources combined with a longer recession, could worsen further debt indicators and lead to the re-emergence of debt related problems in post-completion-point HIPCs who have exhausted all of the standard avenues of debt relief.

  • It is imperative that efforts to improve debt management capacity be sustained (for both external and domestic public debt).

37. The Bank and the Fund are taking a number of steps to help countries that have been affected by the crisis.

  • IDA has made highly concessional financing available for vulnerable countries. At the Fund, as part of the reform of its LIC financing facilities, the IMF’s Board increased significantly the volume of concessional resources available for lending to LICs, approved temporary forgiveness of interest on all concessional loans through end-2011, as well as on all outstanding ENDA/EPCA credit through end-January 2012,49 and adopted a more concessional interest rate structure for the medium term.50

  • The Bank and the Fund have also continued to advocate to donors the importance of providing concessional financing for vulnerable countries and, more generally, of honoring prior commitments on aid to LICs.

  • The staffs are providing LIC members policy and technical advice as regards the appropriate response to the crisis.

  • The staffs also continue to provide technical assistance to improve debt management capacity and training in the use of the DSF, as mentioned above.

VI. Conclusions

38. Very significant progress has been achieved in implementing the HIPC Initiative and the MDRI. With 35 of 40 eligible countries reaching the decision point by end June-2009—of which 26 have reached the completion point—the HIPC Initiative has provided much needed debt relief to most HIPCs. A number of the remaining interim HIPCs are also well placed to progress towards completion point in the period ahead, and benefit from irrevocable debt relief under the Initiatives.

39. Nonetheless, some important challenges remain in order to fully implement the Initiatives. Some pre-decision point countries continue to be affected by severe political problems, while in a number of long-standing interim countries, the progress that has been achieved of late is still at a nascent stage. To reach the completion point, they will need to further strengthen their policies and institutions, and require continued support from the international community. In this regard, it is important for all creditors to provide their full share of HIPC debt relief, and for donors to ensure that the Bank and the Fund have adequate resources to provide their share of debt relief under the Initiatives to all eligible countries.

40. Notwithstanding debt relief, maintaining debt sustainability beyond the completion-point remains an issue for many HIPCs. The analysis conducted by the staff reveals that the current global crisis has exacerbated debt sustainability concerns for a number of countries, but the analysis does not indicate a risk of a major debt crisis in HIPCs. Nonetheless, HIPCs need to implement sound borrowing policies and strengthen their capacity to manage their public debt—two areas where the Bank and the Fund have already been assisting their low-income members.

Simulation Methodology

The assessment of debt vulnerabilities is undertaken within a framework consistent with the DSF (Box 1).1 For every country, the assessment rests upon the evolution of the five DSF debt-burden indicators under baseline scenarios and stress tests, and the use of country-specific policy dependent debt-burden thresholds.

For every country, the starting point for the simulations is the most recent LIC DSA. This provides information on the evolution of: (i) the measures of capacity to repay (GDP, exports and government revenues); (ii) the variables used to assess the external financing needs (exports, imports, net FDI, and net current transfers) and the fiscal financing needs (government revenues, grants and primary non-interest expenditures); and (iii) the measures of indebtedness (PV of public and publicly guaranteed (PPG) external debt and debt service).

Two updated “baseline” scenarios are produced. These scenarios differ in terms of the source of the financing needs (external or fiscal) governing the evolution of the measures of indebtedness. In the first scenario (WEO fiscal scenario), the financing needs are defined as: government revenues + grants – expenditures. In the second scenario (WEO external scenario), the financing needs are defined as: exports + current transfers + net FDI – imports. A deterioration in financing needs compared to the initial LIC DSA is assumed to translate into additional external borrowing only if the country is running a deficit under the WEO scenario.2 Additional financing needs are assumed to be met exclusively through external borrowing in order to gauge the maximum impact on the vulnerability assessment (DSF thresholds relate to external debt).3

Over the 2008–2014 period, the WEO country forecasts are used to update the evolution of the measures of capacity to repay and the variables affecting the financing needs (external and fiscal). More specifically, the WEO growth rates are used to update the level of the relevant LIC DSA variables. This methodology broadly preserves the internal consistency of the country-specific macroeconomic forecasts.

Over the 2015–2019 period, financing needs in the WEO scenarios return smoothly to their respective LIC DSA level (in percentage of GDP). Starting in 2015, under both scenarios, the measures of capacity to repay, net FDI, net transfers and grants grow at the same rate envisaged under the initial LIC DSA. Consistent with the methodology used in LIC DSAs, transitory shocks to growth are not reversed in later years, resulting in a permanent shock to the level of variables. Accordingly, compared to the initial LIC DSAs, the capacity to repay is likely to be lower in the simulations. The spending variables (government expenditures and imports) adjust to achieve the targeted financing needs.

Stress tests are not directly conducted in WEO scenarios. Instead, the response of debt burden indicators to standard DSF stress tests is assumed to be similar to the initial LIC DSA.

Risk ratings are not determined in this exercise. However, countries are deemed to be more vulnerable based on the following criteria:

  • Countries initially classified as moderate risk of debt distress are deemed more vulnerable if they experience a breach of threshold under the “baseline” WEO scenarios.

  • Countries initially classified as low risk of debt distress are deemed more vulnerable if they experience a breach of threshold under the stress tests or the baseline WEO scenarios.

  • Countries initially classified as high risk of debt distress are deemed more vulnerable if at least two debt burden indicators are on average 15 percent higher than their thresholds.4

1 See “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries, IMF, 2008. See also “The Debt Sustainability framework for Low-Income Countries”, Occasional Paper 266, IMF, 2008.2 This rule prevents borrowing by countries running surpluses in the LIC DSA and smaller surpluses in the WEO scenario. In the case where a country is running a surplus in the LIC DSA and a deficit in the WEO scenario, the country is assumed to borrow only the amount of the deficit.3 Unlimited additional external financing is assumed to be available at a grant element of 45 percent. If external financing was obtained on less concessional terms, it would result in a greater deterioration of debt burden indicators. Conversely, if part of the fiscal financing needs are met with domestic borrowing, it would result in lower external debt burden indicators.4 A 15 percent increase in debt burden indicators above their thresholds is consistent with an increase in the probability of debt distress of about 10 percent.

Annex I. Country Status Under the Enhanced HIPC Initiative

Table 1.

HIPC Pre-Decision-Point Countries

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The decision-point document was prepared in February 2007 but withdrawn at the request of the Government, based on its intention to not move to decision-point. Based on 2008 debt data, the Kyrgyz Republic remains well below the HIPC thresholds.

Table 2A:

Interim Countries: Summary by Country

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Table 2B:

Interim Countries: Status of Completion-Point Triggers

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Table 3:

Post-Completion-Point Countries: Progress towards Achieving the MDGs * 1

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Source: World Bank and IMF staff; and Global Monitoring Report, 2009.

* The World Bank determines whether a country is on or off track to meet a given MDG by 2015 when at least two observations are available after 1990, with a sufficient number of years separating them. To do so, it compares the progress recorded thus far with that needed to reach the MDG, under the assumption that progress becomes increasingly difficult the closer countries get to the goal.

Annex II. Country Coverage, Data Sources, and Assumptions for the HIPC Initiative and MDRI Costing Exercise

Country Coverage

  • The costing analysis for the 35 post-decision-point countries includes: Afghanistan, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Côte d’Ivoire, Democratic Republic of the Congo, Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia.

  • The costing analysis for the pre-decision-point countries is based on 4 HIPCs: Comoros, Eritrea, Somalia, and Sudan.53

Data Sources

Assumptions for the HIPC Initiative and MDRI Costing Exercise

  • Calculations of total costs include costs under the original and enhanced HIPC Initiative frameworks and the MDRI.

  • Cost estimates for the HIPC Initiative are based on debt data after full use of traditional debt-relief mechanisms.

  • The following exchange rates have been used for the MDRI calculations:

    • o IDA and AfDF. The initial MDRI Trust Fund replenishment rate of 1.477380 US dollars per SDR was applied for the period FY07–08. Cost estimates for FY09 onward are based on the IDA15 foreign exchange reference rate of 1.524480 US dollars per SDR.

    • o IMF. The exchange rate of the date that debt relief was delivered, and, in cases where debt was not yet delivered, the rate as of end-December 2008 was used.

    • o IaDB. Currency units in US dollars at end-2006.

Update of Cost Estimates in Net Present Value Terms

The cost of HIPC Initiative assistance calculated in NPV terms at the time of the decision-point is discounted to end-2008 using the average interest rate applicable to the debt relief. This rate was estimated at 5.0 percent and corresponds to the implicit long-term interest rate of currencies that comprise the SDR basket over the period 2006–2008, calculated as a 6-month average of the Commercial Interest Reference Rate (CIRR) over this period, weighted by the participation of the currencies in the SDR basket. The same rate was used to calculate MDRI debt relief in end-2008 NPV terms.

Table 1.

Summary of Debt Service and Poverty Reducing Expenditures 1999–20131/

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

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

Data refer to 35 post-decision-point HIPCs, unless specified otherwise.

Debt service paid covers 2001–2008, and debt service due covers 2009–2013. For post-completion point HIPCs, debt service due assumes full HIPC Initiative debt relief, additional debt relief, provided by some Paris Club Creditors on a voluntary basis, and MDRI. For pre-completion-point countries, debt service due includes interim debt relief and full HIPC Initiative and MDRI assistance expected at the projected completion point. See Appendix Table 2 for a detailed breakdown.

Excludes Ethiopia, Malawi, and Zambia for which data is not avaiable.

As defined in PRSPs; excludes Liberia and Malawi for which data is not available. In some countries, the definition of poverty-reducing expenditures has evolved over time to include more sectors.

Table 2.

Debt Service of 35 Post-Decision-Point HIPCs, 2001–2013

(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 under the enhanced HIPC Initiative 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 reflects some payments to commercial creditors and payments on moratorium interest not reflected in the completion point documents.

Reached completion point in 2000.

Reached decision point in 2000.

Post completion point the authorities do not monitor the amount due after enhanced HIPC. Therefore this data is estimated by staff.

Data reported on a fiscal year basis.