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

This report provides an update on the status of implementation, impact, and costs of the 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. Through the continued use by IDA and the Fund of the flexibility available in the framework governing the HIPC Initiative and the MDRI, significant progress has been achieved under the Initiatives since the last report.

Abstract

This report provides an update on the status of implementation, impact, and costs of the 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. Through the continued use by IDA and the Fund of the flexibility available in the framework governing the HIPC Initiative and the MDRI, significant progress has been achieved under the Initiatives since the last report.

Executive Summary

This report provides an update on the status of implementation, impact, and costs of the 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. Through the continued use by IDA and the Fund of the flexibility available in the framework governing the HIPC Initiative and the MDRI, significant progress has been achieved under the Initiatives since the last report.

  • Since September 2009, one country reached the decision point and qualified for HIPC Initiative assistance. Four countries reached the completion point and qualified for irrevocable debt relief under the HIPC Initiative and the MDRI.

  • In total, 36 out of 40 HIPCs have qualified for HIPC Initiative assistance, of which 30 have reached the completion point.

  • Three out of the six HIPCs between decision and completion points (“interim” HIPCs) are expected to reach the completion point in the next 12–18 months.

  • Assistance committed to the 36 HIPCs that have qualified for HIPC Initiative assistance (“post-decision-point” HIPCs) represents on average about 38 percent of these countries’ 2009 GDP. Full delivery of debt relief to these countries will reduce their debt burden by over 80 percent.

Nonetheless, some issues require continued attention in order to implement the Initiatives fully:

  • Some of the ten countries that have not yet reached the completion point and, particularly, a few of the pre-decision-point HIPCs face especially difficult problems. Overcoming these challenges will require sustained domestic efforts and continued support from the international community.

  • Full participation of all creditors, particularly smaller multilateral, non-Paris Club bilateral official and private creditors, remains to be secured.

  • Additional funds will be needed to provide debt relief to the few HIPCs having protracted arrears to IFIs.

  • The incidence of litigation against HIPCs appears to have abated in recent years. Preventing litigation, which can be very costly for HIPCs, remains an important objective. National and multilateral initiatives have sought to respond to the threats associated to creditor litigation.

I. Introduction1

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 progress made in the implementation of both Initiatives since the publication of the 2009 Status of Implementation report.2 Section III updates the estimated costs of debt relief under the Initiatives. Section IV discusses remaining implementation challenges. Section V concludes.

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

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

  • Afghanistan (January 2010), the Republic of the Congo (January 2010), Liberia (June 2010), and the Democratic Republic of Congo (July 2010) reached their respective completion points and qualified for irrevocable debt relief.

  • Comoros (June 2010) reached its decision point and began receiving interim debt relief.

  • As a result, a total of 36 out of 40 HIPCs are now past their decision point of which 30 are past their completion point (Table 1). 3

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 governing the Initiative. Judgment has continued to be used in the area of completion point triggers. The Boards granted waivers to Afghanistan and Liberia for missed triggers on the basis that they had been substantially implemented and sufficient progress had been made toward the underlying objectives. Comoros reached its decision point following the progress made on clearance of its arrears, which will count as debt relief provided by its multilateral and official bilateral creditors.4 Flexibility was also exercised in the area of preparation and implementation of poverty reduction strategies.

Table 1.

List of Heavily Indebted Poor Countries

(as of end-July 2010)

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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.

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.

4. Debt relief provided under the Initiatives has substantially alleviated debt burdens in recipient countries. Overall assistance to the 36 post-decision-point HIPCs under the Initiatives represents on average about 38 percent of these countries’ 2009 GDP.5 This assistance, together with relief under traditional mechanisms and additional (“beyond HIPC”) relief from Paris Club creditors, is expected to reduce the debt burden for these countries by over 80 percent relative to pre-decision-point levels (Figure 1).

Figure 1.
Figure 1.

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

(In billions of U.S. dollars, in end-2009 NPV terms)

Citation: Policy Papers 2010, 083; 10.5089/9781498336840.007.A001

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

5. As a result of debt relief, debt vulnerabilities have been lowered sharply in post- completion-point HIPCs. Debt vulnerabilities in these countries—as measured by the risk of debt distress under the low-income country (LIC) debt sustainability framework (DSF)6—compare favorably with those of non-HIPC LICs. About 76 percent of post-completion-point HIPCs are classified as either facing low or moderate risk of debt distress, compared to 73 percent of non-HIPC LICs. None of the post-completion-point HIPCs is currently assessed to be in debt distress, while 8 percent of the non-HIPC LICs are in that situation (Figure 2).

Figure 2.
Figure 2.

Comparison of Debt Vulnerabilities in Low-Income Countries

Citation: Policy Papers 2010, 083; 10.5089/9781498336840.007.A001

Source: Latest joint Bank/fund DSA available for LICs, and Fund Staff estimatesThe analysis is based on the most recently available DSAs up to end-June 2010, in comparison with the immediately preceding DSA for each country.1/ The increase in the high risk category reflects two new CP countries (Afghanistan and The DRC).

6. Some post-completion-point countries remain vulnerable to debt-related problems, with seven characterized as being at a high risk of debt distress, of which five were already assessed to be at high risk of debt distress last year7 and two (Afghanistan and the Democratic Republic of the Congo) exited the HIPC Initiative this year with a high risk rating. Such vulnerabilities can be explained by a narrow export base or a weak policy and institutional capacity.8 The Democratic Republic of the Congo remains at high risk of debt distress because of a public guarantee on concessional borrowing to finance large infrastructure projects.

7. While the global financial crisis has had a significant impact on debt vulnerabilities in all LICs, including HIPCs, there is no evidence so far of a substantial deterioration in the debt sustainability outlook of post-completion-point HIPCs. No post-completion-point HIPC has yet experienced a rating downgrade on account of the crisis. Furthermore, as discussed in the recent IMF-World Bank paper on Preserving Debt Sustainability in Low-Income Countries in the Wake of the Global Crisis, sustained implementation of a combination of options (institutional reforms, stronger fiscal positions, better financing terms) could reduce debt vulnerabilities significantly over the medium term in all LICs at a high risk of debt distress, including all post-completion-point HIPCs with such a debt vulnerability classification.9

8. The evolution of external debt in post-completion-point HIPCs suggests that debt relief has not so far resulted in a new round of excessive borrowing.10 In these countries, external debt decreased on average by 8.4 percentage points of GDP annually between 2006 and 2009. Even after netting out the impact of the MDRI relief provided during 2006 and 2007, the external debt to GDP ratio decreased by an average of 1.4 percentage points on an annual basis as the contribution of real GDP growth, exchange rate movements, and other factors more than compensated the impact of (non-interest) current account deficits. 11 The decrease took place mostly in 2006–07, with debt ratios increasing somewhat on average in 2008–09, largely reflecting the impact of the high food and fuel prices and the global financial crisis.

9. Only a few post-completion-point countries have engaged in significant nonconcessional borrowing prior to 2009; recourse to such borrowing by post-completion-point countries with lower debt vulnerabilities is expected to increase. For example, Ethiopia significantly increased public sector borrowing after 2006, reaching almost 7 percent of GDP in fiscal year 07/08. Borrowing was used to finance the government’s public investment program and was contracted from both concessional and nonconcessional external sources, as well as domestic sources. 12 Ghana also had recourse to substantial borrowing during 2006–2008, including a US$750 million bond issuance in late 2007. As a result, its total public debt increased from 42 percent of GDP in 2006 to 58 percent of GDP in 2008. Neither country experienced a deterioration in its external risk of debt distress rating as a result of this borrowing.13 Recent amendments to the Fund’s policy on debt limits in Fund-supported programs and IDA’s Nonconcessional Borrowing Policy have provided more flexibility for accessing nonconcessional borrowing to countries at low or moderate risk of debt distress with the aim of facilitating financing of growth-enhancing investment while preserving debt sustainability. 14 Some of the post-completion-point HIPCs have started to take advantage of this flexibility in their Fund-supported programs.

10. Concomitant with progress under the Initiatives, HIPCs have been able to increase their poverty-reducing expenditure. For the 36 post-decision-point countries, poverty-reducing expenditure increased by more than three percentage points of GDP, on average, between 2001 and 2009, while debt service payments declined by a similar amount (Figure 3 and Appendix Table 1). The share of poverty reducing expenditure in HIPCs has increased from 44 percent of revenues in 2001 to 54 percent in 2009 and this share is expected to increase to 57 percent, almost 10 percent of these countries’ GDP, in 2010 despite the economic crisis.15

Figure 3.
Figure 3.

Average Poverty Reducing Expenditure and Debt Service in HIPCs1/

Citation: Policy Papers 2010, 083; 10.5089/9781498336840.007.A001

Sources: HIPC documents; and IMF staff estimates.1/ Prior to 2009, figures represent debt service paid, and thereafter, projected debt service.For detailed country data, refer to Appendix Table 2.
Table 1.

Summary of Debt Service and Poverty Reducing Expenditures 2001-2014 1/

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

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

Data refer to 36 post-decision-point HIPCs, unless specified otherwise.

Debt service paid covers 2001-2009, and debt service due covers 2009-2014. 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 Afghanistan, Benin, Ethiopia, Ghana, and Zambia for which data is not avaiable.

As defined in PRSPs; excludes data for years in countries for which data is not available. See Appendix Table 3 for a country breakdown.

Table 2.

Debt Service of 36 Post-Decision-Point HIPCs, 2001-2014e

(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.