Initiative for Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI)-Status of Implementation and Proposals for the Future of the HIPC Initiative
Author: International Monetary Fund
Publication Date:
11 Aug 2011
eISBN:
9781498338295
Language:
English
Keywords:
PP; IMF-IDA report; IDA staff; IDA board; MDRI debt relief; IDA-managed DRTF; IMF MDRI assistance; debt-relief framework; adjustment program; IMF staff estimate; beyond-HIPC debt relief
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This report aims to accomplish three objectives: (a) it 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); (b) it proposes a modification of the reporting of progress under the initiatives, including the discontinuation of the annual status of implementation reports, and the preparation of periodic reports on debt vulnerabilities in low income countries (LICs), including HIPCs; and (c) it proposes a further ring-fencing of the list of countries eligible or potentially eligible for debt relief under the HIPC Initiative based on end-2010 income and indebtedness criteria.

Abstract

This report aims to accomplish three objectives: (a) it 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); (b) it proposes a modification of the reporting of progress under the initiatives, including the discontinuation of the annual status of implementation reports, and the preparation of periodic reports on debt vulnerabilities in low income countries (LICs), including HIPCs; and (c) it proposes a further ring-fencing of the list of countries eligible or potentially eligible for debt relief under the HIPC Initiative based on end-2010 income and indebtedness criteria.

I. Introduction1

1. This report provides an update on the status of implementation of the HIPC Initiative and the MDRI over the past year and presents proposals for the future of the HIPC Initiative. Although some challenges remain, the HIPC Initiative has been largely completed. As a result of progress in the last few years, 36 out of 40 HIPCs have reached the decision point, and 32 HIPCs have reached the completion point and also benefited from debt relief under the MDRI. Three of the four interim HIPCs are making progress toward the completion point. Only four potentially eligible countries are yet to start the process of qualifying for debt relief under the Initiative. At informal sessions in late February and early March 2011, the Executive Boards of the IMF and IDA agreed that, in view of the substantial progress that has been achieved under the HIPC Initiative to date, this was an opportune time to consider the future of the Initiative.2 They asked the staffs to prepare specific proposals for presentation in the next report on the status of implementation of the HIPC Initiative and the MDRI. At these informal sessions, the Boards also discussed changes to the reporting of progress under the initiatives, including discontinuing the status of implementation report in its current form.

2. The report is organized as follows: Section II reports on progress under the initiatives since the publication of the 2010 report.3 It also updates estimates of the benefits and costs of the initiatives and reviews progress in enhancing creditor participation, addressing commercial creditor litigation, and securing the financing of the initiatives. As this is intended to be the last status of implementation report, Section III makes proposals on how reporting of future developments under the initiatives would be handled and proposes the introduction of periodic reports to monitor debt vulnerabilities in LICs, including HIPCs. Section IV reviews options for the future of the HIPC Initiative and, in light of the earlier informal Board discussions, recommends the inclusion of end-2010 income and indebtedness criteria for potential eligibility under the Initiative. Section IV also reviews the assessment of potential eligibility of remaining HIPCs based on new end-2010 income and indebtedness criteria. Section V presents issues for discussion.

II. Implementation of the HIPC Initiative and the MDRI over the Past Year

A. Country Progress

3. Further progress has been made under the HIPC Initiative over the past year. Guinea-Bissau and Togo both reached their completion points in December 2010 and qualified for irrevocable debt relief.4 Of 40 HIPCs,5 32 have now reached the completion point and another four the decision point (Table 1).

Table 1.

List of Heavily Indebted Poor Countries

(As of end-July 2011)

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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 eligible or 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. This table does not list those countries that indicated that they did not wish to avail themselves of assistance under the Initiative, either at the time of the 2006 ring-fencing (Bhutan and Lao PDR) or later (Nepal).

B. Debt Service Relief and Poverty Reducing Expenditure

4. Debt relief under the HIPC Initiative and the MDRI has substantially lowered the debt burdens of HIPCs. Debt relief under the initiatives to the 36 post-decision point HIPCs represents almost 35 percent of these countries’ 2010 GDP. 6 Together with debt relief under traditional mechanisms and additional ("beyond HIPC") relief from Paris Club creditors, this assistance is estimated to reduce the debt burden for these countries by about 90 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-2010 PV terms)

Citation: Policy Papers 2011, 059; 10.5089/9781498338295.007.A001

Source: World Bank and IMF staff estimates.

5. In parallel to the delivery of debt relief, HIPCs have increased their poverty reducing expenditure. For the 36 post-decision point countries, poverty reducing spending increased by more than three percentage points of GDP, on average, between 2001 and 2010, while debt service payments declined by a somewhat smaller amount (Figure 2 and Annex III Table 1). Notwithstanding these developments, HIPCs have made uneven, and in some cases limited, progress toward achieving the MDGs. For most of the 32 completion point HIPCs universal primary education is within reach, but half of them still have to implement additional reforms in order to achieve this target. More than half of completion point HIPCs are expected to meet their targets with respect to gender equality and preventing the spread of HIV/AIDS, TBC and malaria, and about half of them are on track to reduce under-five mortality rates and ensure environmental sustainability. However, only a quarter of completion point HIPCs are on track to meeting MDG 1 (to eradicate extreme poverty and hunger), with progress toward MDG 6 (to improve maternal health) less certain. Only a few HIPCs are on track to meet MDG 8 (to build a global partnership for development) (Annex III Table 3).

Figure 2.
Figure 2.

Average Poverty Reducing Expenditure and Debt Service in HIPCs 1/

Citation: Policy Papers 2011, 059; 10.5089/9781498338295.007.A001

Sources: HIPC documents and IMF staff estimates1/ For detailed country data and projections, refer to Appendix Table 2 and Table 3.

C. An Update of the Costs of the Initiatives

6. The total cost of HIPC Initiative debt relief to creditors is estimated at US$76 billion in end-2010 present value (PV) terms (Table 2). The estimated costs are broadly unchanged relative to 2010 estimates. Changes reflect small revisions of data for the two new completion point countries and a lower discount rate.7 About two-thirds of the cost (US$54.6 billion) represents irrevocable debt relief to the 32 post-completion point countries. The estimated cost for the four interim countries amounts to US$4.4 billion.8 The estimated cost of HIPC Initiative debt relief to the creditors of the remaining four 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, which has been provided so far to seven HIPCs, represents less than 3 percent of the total HIPC Initiative cost.9

Table 2.

HIPC Initiative: Costs by Main Creditor and Country Group

(In billions of U.S. dollars, in end-2010 PV terms, unless otherwise indicated)

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

Total costs as reported in Table 2 of “HIPC Initiative and MDRI: Status of Implementation, September 2010”, discounted to end-2010 terms.

Since August 2010, Togo and Guinea-Bissau reached the completion point.

7. Multilateral and Paris Club creditors bear the largest shares of the total cost of the HIPC Initiative, but non-Paris Club and commercial creditors are expected to provide a relatively larger share of debt relief for pre-decision point HIPCs. Among multilateral creditors (accounting for 45 percent of the total cost), the heaviest burdens are borne by IDA (20 percent), the IMF (9 percent), and the AfDB group (7 percent). The share of the total cost borne by multilateral creditors is higher for post-completion point countries (50 percent) than for interim countries (35 percent) and pre-decision point countries (31 percent). Bilateral creditors account for over half of the total cost of the HIPC Initiative, most of which is borne by Paris Club creditors (36 percent). Non-Paris Club official creditors and commercial creditors account for 13 percent and 6 percent, respectively. However, non-Paris Club creditors are expected to deliver about 30 percent of HIPC Initiative assistance to pre-decision point HIPCs. Hence, only broad participation of creditors would ensure the effective delivery of HIPC Initiative debt relief in those cases.

8. The total cost of the MDRI for the four participating multilateral creditors is estimated at US$33.8 billion in end-2010 PV terms (Table 3). About 65 percent of the total estimated MDRI cost will be borne by IDA, with the share of the IMF and AfDF amounting to 12 percent and 15 percent, respectively, and that of the IaDB amounting to 8 percent. Out of the total cost, US$30.3 billion in PV terms has already been delivered to the 32 post-completion-point countries. The IMF has also provided MDRI relief to Cambodia and Tajikistan (Table 3 and Appendix Table 4).

Table 3.

MDRI: Nominal Costs by Creditor and Country Group (In billions of U.S. dollars)

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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. For Liberia, Somalia, and Sudan, the costs represent the MDRI-type, beyond-HIPC debt relief.

IMF MDRI assistance to Cambodia and Tajikistan.

9. Some creditors have given debt relief to HIPCs that goes beyond the requirements under the HIPC Initiative. Paris Club official bilateral creditors have provided, on a case by case basis, beyond HIPC Initiative debt relief amounting to US$11.9 billion in end-2010 PV terms (see Appendix Tables 12 and 13). In addition to debt relief under the HIPC Initiative, the EU provides debt relief under the Least Developed Countries (LDC) Initiative by cancellation of the debt outstanding on special loans after the application of HIPC Initiative relief.10 Most multilateral and bilateral creditors have approved the cancellation of outstanding debt beyond HIPC and MDRI to help Haiti recover from the January 2010 earthquake.11

D. Implementation Issues

10. Notwithstanding the substantial success in completing the tasks of the HIPC Initiative, ongoing challenges remain, including (i) mobilizing full participation of all creditors; (ii) addressing the issue of commercial creditor litigation; (iii) ensuring the full financing of the HIPC Initiative and the MDRI; (iv) taking the interim HIPCs to the completion point; and (v) eventually providing debt relief to the pre-decision point countries and possibly Zimbabwe.

Creditor Participation

11. To ensure that the country’s debt burden indicators are reduced to the HIPC Initiative thresholds, it is critical that all creditors deliver their share of debt relief to HIPCs. This is also consistent with the principle of the HIPC Initiative of broad and equitable participation of creditors in the provision of debt relief. As the large multilateral and Paris Club creditors have provided their full share of debt relief, this section reports on smaller multilateral, non-Paris Club bilateral, and commercial creditors.

12. The majority of small multilateral creditors have committed to deliver debt relief at the completion point (Appendix Table 5). In addition to the largest four creditors12, another 20 multilateral creditors, accounting for 13 percent of total HIPC Initiative costs (US$3.8 billion in end-2010 PV terms) have committed to deliver debt relief to all HIPCs at the completion point.13 However, another eight multilateral creditors, representing less than 0.6 percent of estimated HIPC cost, have not yet indicated their intention to provide relief under the HIPC Initiative.

13. Smaller multilateral creditors have delivered 55 percent of total HIPC Initiative debt relief committed to completion point HIPCs. According to the annual survey carried out by the World Bank, to which 10 institutions responded (the same number as in 2010), all but two multilateral creditors have already delivered at least 50 percent of committed debt relief14. Staffs are working with their counterparts in the other 10 multilateral development banks (MDBs),15 which represent only 2 percent of the total HIPC debt relief committed to post-completion point HIPCs, to increase the survey response rate. The staffs also continue to encourage the eight multilateral creditors that have not committed to providing debt relief to do so.

14. There has been some increase in the delivery of debt relief under the HIPC Initiative from non-Paris Club bilateral creditors over the past year. Mainly as a result of the delivery of debt relief by Algeria to an additional 10 HIPCs, including sizable relief to Mauritania and Mozambique, the overall delivery of assistance has increased to 39–43 percent (from 34–39 percent last year). Some non-Paris Club creditors (China, Cuba, and Kuwait) have delivered debt relief to the two countries that reached the completion point in the last 12 months–Guinea-Bissau and Togo–while others have not (Portugal, Saudi Arabia, and UAE). The low delivery rate of debt relief by non-Paris Club creditors remains disappointing. IMF and World Bank staffs continue to encourage non-Paris Club creditors to deliver their share of debt relief under the HIPC. These efforts have focused on moral suasion as participation by creditors in the HIPC Initiative is voluntary.

15. Delivery of debt relief by commercial creditors to HIPCs has increased in recent years. Commercial creditors account for US$4.6 billion (2010 PV terms), or 6 percent of the total cost of debt relief to be provided to all 40 HIPCs The increased participation of commercial creditors in the provision of debt relief has been supported by buyback operations supported by IDA’s Debt Reduction Facility (DRF). In December 2010, DRF provided support to Liberia for the conclusion of the second closing of the April 2009 external commercial buyback operation. The second closing has extinguished the debt of the remaining two hold-out creditors at fully comparable terms to those achieved in the first closing.

16. Currently the DRF will expire on June 30, 2012 and no operation can be approved after end-March 2012. The Board of IDA will have to take a decision on the extension and possible replenishment of the DRF in early 2012. A large share of commercial debt eligible for debt relief remains for the Democratic Republic of Congo, estimated at US$897 million, and for Sudan, estimated at around US$5 billion.

Commercial Creditor Litigation

17. The declining trend in the number of commercial creditor litigation cases against HIPCs of recent years flattened over the past year. According to survey responses from HIPCs, the number of litigation cases being pursued against them remained unchanged at 17 between 2010 and 2011, with two cases against Liberia resolved with support from IDA’s DRF but two new ones launched against the Democratic Republic of Congo. It is too early to assess the impact of national and multilateral initiatives intended to respond to the threat of creditor litigation against HIPCs that were discussed in last year’s status of implementation report, although there have been suggestions that the UK initiative encouraged two hold-outs on Liberia to accept the terms on offer from the DRF.16 17

Ensuring the Financing of the Initiatives

18. During the IDA 16 replenishment, donors agreed to provide additional contributions to finance IDA’s MDRI and HIPC Initiative-related costs, and financing for arrears clearance operations. HIPC compensation would amount to SDR 1 billion and arrears clearance operations are expected to amount to SDR 0.4 billion.18 A separate IDA replenishment was established to finance IDA’s forgone credit reflows under the MDRI spanning four decades (FY07–44). During the IDA 16 discussions, donors reiterated their commitment to fully finance the costs to IDA of providing MDRI debt relief (SDR 3.5 billion during the IDA 16 period), and that financing of these costs would be additional to regular IDA contributions. 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.19

19. The Debt Relief Trust Fund (DRTF) has sufficient resources to help finance the future cost of debt relief for the eligible creditors.20 The IDA-managed DRTF, in addition to supporting eligible regional and multilateral creditors in providing HIPC Initiative debt relief to HIPCs, may utilize 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. As of June 30, 2011, donors have pledged and contributed US$3.9 billion to the DRTF to support the eligible regional and sub-regional creditors (See Appendix Table 10).21 The DRTF has accumulated investment income amounting to US$380 million on those contributions and allocated for disbursement about US$3.2 billion. Excluding US$476 million in pending disbursements, the remaining amount of resources available for future debt relief operations totaled US$657 million as of June 30, 2011. This amount is equivalent to the current estimate of debt relief expected to be provided by eligible creditors to the four interim HIPCs and the three pre-decision point HIPCs that are expected to qualify for HIPC debt relief.

20. For the IMF, available resources are estimated to be sufficient to cover the projected costs of debt relief to all the remaining HIPCs, excluding Somalia and Sudan Additional resources will be needed if and when these countries embark on the HIPC Initiative process, as well as if additional countries with outstanding liabilities to the Fund were to eventually qualify for the HIPC Initiative.22 Moreover, if topping up is required in any future HIPC case additional resources would be required. In all these cases, resources would need to be mobilized from the international community.

Taking the Interim HIPCs to the Completion Point

21. Three of the four interim phase countries—Comoros, Cote d’Ivoire, and Guinea—could reach the completion point in 2012:

  • Comoros, which reached its decision point in June 2010, could reach the completion point in late 2012 or in 2013, provided its ECF-supported program is put back on track through measures aimed at curbing the wage bill and restarting the civil service and public enterprise reform programs.

  • Before the political crisis in the first half of 2011, Côte d’Ivoire had been expected to reach the completion point in the second half of 2011. The IMF recently approved a new ECF arrangement with Côte d’Ivoire that signals a resumption of progress toward the completion point. Provided that progress is also made on the adoption and implementation of a new institutional and regulatory framework for the cocoa/coffee sectors and on the implementation of the PRSP, the completion point could be reached by mid-2012.

  • The new government in Guinea has indicated that it regards reaching the completion point as a high priority. Guinea is seeking an ECF arrangement with the IMF and has started the implementation of a poverty reduction strategy (PRS). If implementation of an ECF-supported program and the PRS are deemed to be satisfactory, Guinea could reach the completion point by end-2012.

Prospects for Chad are uncertain as poor macroeconomic policy performance and limited progress towards other completion point triggers have prevented it from reaching the completion point. Improved macroeconomic policy performance could pave the way toward an IMF staff-monitored program and, if successful, toward an ECF-supported program and, eventually, the attainment of the completion point.

The Pre-Decision Point Countries and Zimbabwe

22. The situation of the pre-decision point countries is generally challenging The Eritrean authorities indicated in 2009 that they might consider seeking HIPC Initiative assistance but they have not reiterated their interest since and it remains uncertain if and when they might seek debt relief. The authorities of the Kyrgyz Republic indicated in early 2007 that they did not wish to avail themselves of assistance under the HIPC Initiative but subsequently expressed an interest in the MDRI, for which participation in the HIPC Initiative is a prerequisite. The protracted arrears cases of Somalia and Sudan complete this group. While Somalia remains heavily indebted, it has no functioning government and its future relations with the international community are highly uncertain.

23. Sudan remains deeply indebted and faces the loss of significant export and fiscal receipts following the independence of South Sudan on July 9, 2011 While a number of difficult issues remain unresolved between Sudan and South Sudan, including oil revenue sharing, they have reached a tentative agreement on public external debt, which would leave all the debt with Sudan, allowing South Sudan to start with a clean slate ("the zero option"). This agreement is contingent on South Sudan supporting Sudan in mobilizing creditor support for debt relief and on Sudan reaching the decision point under the HIPC Initiative within two years.23 Since early 2011, a working group, convened by IMF and IDA staffs and comprising some of Sudan’s main multilateral and bilateral creditors has been engaged in technical work on Sudan’s external debt. While Sudan’s main external creditors have indicated broad support for debt relief under established processes, including traditional debt relief mechanisms and the HIPC Initiative, some of them face legal constraints in committing to the provision of debt relief to Sudan. Moreover, in the period leading up to the decision point, Sudan would need to have established a track record of strong policy performance under programs covering macroeconomic policies and structural and social policy reforms, as well as make progress on preparing a poverty reduction strategy24.

24. While currently not potentially eligible for debt relief under the HIPC Initiative, Zimbabwe faces an unsustainable debt situation, and may at some point need comprehensive debt relief from the international community. Zimbabwe was not included in the list of potentially eligible countries in 2006, as, at the time, it was neither PRGF-eligible (because of its removal from the list o PRGF-eligible countries as a result of its arrears to the Trust Fund) nor IDA-only. However, a preliminary assessment based on incomplete data suggests that Zimbabwe may have met the end-2004 indebtedness criterion, albeit by a small margin. For the Fund, this means that, should Zimbabwe’s PRGT-eligibility be re-instated following the resolution of its arrears to the PRGT, it could be added to the list of countries potentially eligible for HIPC Initiative assistance, if the assessment against the indebtedness criterion were to be confirmed. For the World Bank, the HIPC Initiative income criterion is bound by the end-2004 cutoff, i.e., any change in a country’s IDA status post- 2004 is not a relevant consideration. Thus, because of the joint nature of the relief, for Zimbabwe to be deemed eligible for HIPC Initiative relief, a modification of, or exception to, IDA’s HIPC Initiative potential eligibility criteria would be required. Moreover, beyond eligibility considerations, to qualify for debt relief under the HIPC Initiative, Zimbabwe would need to build a track record of macroeconomic and structural policy performance under IMF and World Bank-supported programs, clear its arrears to IFIs, or have in place plans to clear such arrears, and develop a poverty reduction strategy.

III. Reporting on Debt Relief Progress and LIC Debt Vulnerabilities

A. Further Streamlining of Reporting on Debt Relief Progress

25. IMF and IDA staffs have closely monitored progress under the HIPC Initiative since its inception through regular status reports. These reports have tracked the progress of HIPCs through the debt relief process, provided updates on the estimated cost of the HIPC Initiative and of the MDRI to various creditors or creditor groups, reported on the participation rates of creditors in the HIPC Initiative, and monitored commercial creditor litigation against HIPCs. The intensity of reporting on progress under the HIPC Initiative has been streamlined over time. Initially comprehensive progress reports were prepared semiannually. In 2003, one of the progress reports was converted into a statistical update, which was subsequently abolished in 2006.

26. Given that most HIPCs have now reached the completion point, IMF and IDA staffs see a strong case for further streamlining HIPC Initiative and MDRI progress reporting. Rather than producing an annual status of implementation report along the lines of this one, the staffs propose updating pertinent information regularly and making it available on dedicated sections of the IMF and World Bank’s websites. The information to be posted would correspond to the information currently provided in the text tables and figures and the statistical appendix. Estimates of the costs to various creditors and creditor groups would continue to be updated and released. Monitoring of debt relief delivery and litigation against HIPCs would be conducted in the context of individual annual debt sustainability analysis and summarized regularly. The progress of HIPCs in increasing poverty reducing expenditure and reaching their MDGs would continue to be tracked and information posted on the IMF and World Bank websites.

B. Monitoring of and Reporting on LIC Debt Vulnerabilities

27. Although a third of low income countries (LICs)25 are either in debt distress or at high risk of debt distress, there is no systemic evidence that debt vulnerabilities among LICs have intensified over the last 18 months (Figure 3). An April 2010 IMF-IDA report concluded that, while the global financial crisis had had a significant impact on LIC debt vulnerabilities, the crisis was not expected to result in systemic debt difficulties across LICs.26 Relative to early 2010, the number of LICs currently rated at high risk of debt distress or in debt distress has declined slightly, mainly because some HIPCs that were previously in debt distress have reached the completion point and seen a dramatic improvement in their debt sustainability outlook.

Figure 3.
Figure 3.

Distribution of Debt Distress Ratings, April 2010 vs. September 2011

(Number of countries)

Citation: Policy Papers 2011, 059; 10.5089/9781498338295.007.A001

Source: Joint IMF-World Bank DSAs.

28. A quarter of the post-completion point HIPCs are rated at high risk of debt distress, and none is in debt distress (Table 4). Such vulnerabilities can be explained by a narrow export base or weak policy and institutional capacity.27 Notwithstanding the significant share of LICs with elevated debt distress ratings, systemic debt difficulties across LICs, that would warrant new debt relief initiatives, are presently not expected. Instead, the debt vulnerabilities of LICs will need to be addressed through sustained efforts, including from their donors, involving a combination of fiscal consolidation, improvements in institutions and policies, and more concessional financing terms on their external borrowing.

Table 4.

LICs at High Risk of Debt Distress, or in Debt Distress, September 2011

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Kiribati is rated at high risk of debt distress in the latest DSA and is included in this table. It is not included, however, in Figure 3, as it does not have earlier DSA rating for comparison.

29. IDA and the IMF are providing assistance to help LICs maintain debt sustainability. The joint IMF-World Bank LIC Debt sustainability Framework (DSF) supports LICs’ efforts to achieve their development goals without creating future debt problems. The IMF and IDA also provide debt management technical assistance to LICs and IDA-only countries through the Debt Management Facility (DMF).28 In 2006, IDA adopted a grant allocation framework that provides ex ante response to the risks of future debt distress (thus reducing future debt service obligations in response to the likelihood of the country facing an unsustainable debt burden that could result, among others, from shocks).29

30. IMF and IDA staffs propose preparing periodic reports on debt vulnerabilities in LICs, including HIPCs. With a significant share of LICs at elevated risk of debt distress, the debt situation in these countries warrants close monitoring. Moreover, given the limited availability of concessional financing, a number of LICs, mainly those at low or moderate risk of debt distress, have begun to rely on non-concessional external borrowing to finance priority infrastructure investment, facilitated in part by the IMF’s new debt limits policy and the adjustments to the implementation arrangements of IDA’s non-concessional borrowing policy. 30 Increased recourse to non-concessional financing by LICs underscores the need for the close monitoring of evolving debt vulnerabilities in LICs. The staffs, therefore, see a strong case for intensifying the cross-country monitoring of, and reporting on, debt vulnerabilities in LICs, including HIPCs. The vehicle for such monitoring and reporting would be periodic joint IMF-IDA reports on LIC debt vulnerabilities based on the LIC DSAs and DSA updates prepared in the preceding 12-month period, as well as other pertinent information.

IV. The Future of the HIPC Initiative

A. Background

31. The HIPC Initiative was not intended to be a permanent mechanism to relieve the external debts of LICs. The Initiative was effectively closed to new entrants in 2006 when the sunset clause was allowed to take effect and the list of potentially eligible HIPCs was ring-fenced. The initial design of the Initiative included a "sunset clause", a two-year period within which members had to adopt an upper credit tranche-type program supported by the IMF ("the performance eligibility criterion"). The sunset clause was motivated by a desire to minimize moral hazard and to encourage HIPCs to adopt early economic reform programs.31 After four extensions, the sunset clause was allowed to take effect at end-2006 but countries potentially eligible for HIPC Initiative debt relief were grandfathered (Box 1). Earlier in 2006, a Board-endorsed ring-fencing exercise had been conducted, which restricted HIPC Initiative eligibility to a list of potentially eligible countries that had been assessed to have met the Initiative’s income and indebtedness criteria, based on end-2004 data, or, in cases where needed data were not available, countries that might be assessed to have met these criteria at end-2004 at some point in the future (Table 4).32 These ring-fenced countries can only qualify for debt relief (i.e., reach the decision point) if their debt burden were to remain above the relevant HIPC Initiative debt sustainability thresholds based on the most recent available actual debt data and if they remain IDA-only and PRGT-eligible.

Table 5.

Status of HIPC Initiative Implementation and Ring-Fencing at End-2006

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Countries that had reached the decision point but not the completion point.

The Kyrgyz Republic later indicated that it did not wish to avail itself of the Initiative but subsequently expressed an interest in the MDRI.

Nepal later indicated that it did not wish to avail itself of assistance under the Initiative.

Sri Lanka later graduated from PRGT-eligibility and thereby from HIPC Initiative eligibility.

Lack of data did not allow assessment relative to end-2004 income and debt criteria. Afghanistan was later assessed to have met the criteria.

Zimbabwe was neither PRGT-eligible nor IDA only and therefore not assessed. A very preliminary assessment suggests that it met the debt criterion.

The Sunset Clause and the 2006 Ring-Fencing Exercise

The sunset clause was a key element of the original design of the HIPC Initiative framework.1 It sent a clear signal that the timeframe for qualifying for eligibility under the Initiative would not be unlimited, thereby providing incentives to potentially eligible countries to adopt IMF and IDA-supported adjustment programs early.2 It was also intended to limit the build-up of new debt before application of debt relief, thereby mitigating moral hazard.3

Slower-than-expected progress under the HIPC Initiative necessitated four extensions of the sunset clause. In agreeing to the extension in 2004, the IMF and IDA Boards decided that potential eligibility would be limited ("ring-fenced") to countries meeting the Initiative’s income and indebtedness criteria based on end-2004 data. In April 2006, the Boards endorsed and agreed to close the list of countries that at that time had been assessed to have met these two criteria (for the Fund, only the end-2004 indebtedness criterion was binding).4

The list included 11 countries that were assessed to have met the criteria and had not indicated that they did not wish to avail themselves of HIPC Initiative assistance. An additional three countries meeting the criteria indicated that they did not wish to take part in the initiative.5 The Boards also decided that the list could subsequently be amended to include other countries for which end-2004 data, while not available at the time of the ring-fencing exercise, were to become subsequently available and show that the relevant criteria were met.

In late 2006, the Boards decided to let the sunset clause take effect at the end of that year and grandfathered all the previously ring-fenced countries. With this decision all countries on the ring-fenced list would remain potentially eligible for debt relief under the HIPC Initiative.

1 The 1996 program for action stipulated that "the Initiative would be open to all HIPCs that pursue or adopt programs of adjustment and reform supported by the IMF and the World Bank in the next two years, after which the Initiative would be reviewed and a decision made whether it should be continued.2 Eligibility for HIPC Initiative assistance is contingent on meeting an income criterion (a country must be PRGT- eligible and IDA-only) and having a debt ratio higher than the relevant HIPC threshold after full application of traditional debt relief mechanisms.3 These considerations regarding the sunset clause were made in the 1998 review of the Initiative (see "The Initiative for Heavily Indebted Poor Countries—Review and Outlook," September 1998).4 For IDA, both the income and indebtedness criteria are bound by the end-2004 deadline; hence, countries whose IDA-only/PRGF-eligible status later changes would not be considered "potentially eligible" for HIPC Initiative debt relief under the criteria approved by IDA. However, the IMF Board decided that only the indebtedness eligibility criterion would be applied to end-2004 data, and not the income criterion (see "PRGF-HIPC Trust Instrument-Amendments to Eligibility Criteria," October 2004).5 "Heavily Indebted Poor Countries (HIPC) Initiative—List of Ring-Fenced Countries that Meet the Income and Indebtedness Criteria at End-2004," April 11, 2006.

32. Considerable progress has been achieved under the HIPC Initiative since 2006. Seven countries have reached the decision point during this period. Six of these countries were among the 11 countries included in the 2006 ring-fenced list; the seventh, Afghanistan, was later added to the list when it was assessed to have met the income and debt criteria at end-2004. Moreover, one country, Sri Lanka, graduated from PRGT-eligibility, and thereby HIPC Initiative eligibility, during this period. Thus, only four ring-fenced HIPCs—Eritrea, Kyrgyz Republic, Somalia, and Sudan—are yet to reach the decision point, while three additional countries—Bhutan, Lao P.D.R., and Nepal—that have expressly indicated that they do not wish to avail themselves of assistance under the HIPC Initiative, remain potentially eligible for assistance.33 Moreover, while not a HIPC, Zimbabwe faces an unsustainable debt burden. The potential eligibility of Myanmar, which could not be assessed in 2006 because of lack of data, remains in doubt.

33. In summary, the HIPC Initiative is largely complete. Only a few potentially eligible and interested HIPCs are yet to qualify for debt relief under the HIPC Initiative. Among these, only Sudan has expressed a keen interest in obtaining assistance under the Initiative, while Eritrea’s intentions are unclear and prospects for Somalia’s engagement with the international community are highly uncertain. Zimbabwe is currently not potentially eligible but is likely, at some point, to need comprehensive debt relief from the international community. In the meantime, four countries that have indicated that they do not wish to avail themselves of HIPC Initiative assistance, remain potentially eligible for such relief.

B. Two Main Options

34. In their informal discussion of the future of the HIPC Initiative earlier this year, the IMF and IDA Boards expressed little support for making the HIPC Initiative a permanent facility or for closing it down. The former option would neither be consistent with the original intent of the Initiative nor justified by the current debt sustainability outlook in LICs. It would also be beset with moral hazard. At the same time, fixing a timeline for the closure of the Initiative—say within two years—might not allow the debt situation of some potentially eligible countries to be addressed. While this option would respond to concerns raised about the longevity of the HIPC Initiative, it would eventually require either the setting up of a new debt-relief framework or dealing with each country on a case-by-case basis, which would be politically challenging, time consuming, and ultimately costly.34

35. Two options for the future of the HIPC Initiative appeared to have the most support in the Boards: (i) maintaining the Initiative "as is"; and (ii) adding new income and indebtedness criteria (end-2010) and further ring-fencing potentially eligible countries.

  • Maintaining the status quo: Under this option, the Initiative would remain closed to new entrants. All currently potentially eligible HIPCs, including those that have indicated that they do not wish to avail themselves of HIPC Initiative assistance or those that are later assessed to have met the end-2004 income and indebtedness criteria, would retain their potential eligibility indefinitely.35 This option would afford these countries the opportunity to obtain debt relief on a timetable suitable to their individual circumstances (assuming they were to continue to qualify for such debt relief). Its main drawback is that it would perpetuate moral hazard, including for the countries that have hitherto not expressed an interest in debt relief under the Initiative, as qualification for, and the amount of debt relief committed, at the decision point depends on the debt stock for which the most recent information is available.

  • Adding new income and indebtedness criteria and further ring-fencing: Further ring-fencing of potentially eligible countries based on additional eligibility criteria relevant to the objectives of the provisions of the IMF’s Articles (and related Executive Board policies) pursuant to which debt relief is provided is legally feasible. For instance, an indebtedness criterion at a date later than end-2004 (e.g., at end-2010) could be seen as relevant from a Fund perspective and imposed as an additional criterion for HIPC eligibility.36 On the IDA’s side, the Board could revise the terms of the Initiative to allow countries otherwise eligible to permanently exit the Initiative through an amendment of its eligibility criteria or a further ring-fencing exercise. This option was already anticipated in 2006.37 It would lead to the exclusion of most, of the countries currently potentially eligible that have indicated that they do not wish avail themselves of HIPC Initiative assistance as their debt ratios have fallen below the relevant HIPC Initiative thresholds in recent years (see below). Once it were to be determined that these countries are no longer potentially eligible, they would no longer be able to avail themselves of debt relief under the Initiative, even if their debt ratios were to exceed HIPC Initiative thresholds at some point in the future.38

36. IMF and IDA staffs propose that the latter of these options be implemented. This option would eliminate considerable moral hazard and underscore the extent to which the HIPC Initiative has been successfully implemented. It would have the added benefit of meeting the expressed desire of most of the countries not wishing to avail themselves of assistance under the Initiative. The staffs are cognizant of the need to communicate any changes to the HIPC Initiative carefully, with an emphasis on its successful implementation to date. A further ring-fencing would not affect the delivery of debt relief for interim countries that have not reached the completion point, nor prevent pre-decision point HIPCs that have expressed interest in participating in the Initiative to reach the decision point according to their capacity to implement reforms.

C. Country Assessments against New Income and Indebtedness Criteria

37. IMF and IDA staffs have assessed the remaining potentially eligible countries against the HIPC Initiatives’ income and indebtedness criteria as of end-2010. All these countries met the income criterion at end-2010 as they remained PRGT-eligible and IDA- only. Three countries—Bhutan, the Kyrgyz Republic, and Lao PDR—did not meet the indebtedness criterion at end-2010, while four—Eritrea, Nepal, Somalia, and Sudan—met the criterion (see Annex I for the detailed country-by-country assessments). Thus, the addition of end-2010 income and indebtedness criteria to the HIPC Initiative framework would retain only Eritrea, Nepal, Somalia, and Sudan on the list of potentially eligible HIPCs.

38. While not assessed as part of the ring-fencing exercise, the possibility for Zimbabwe’s to obtain assistance under the HIPC Initiative would not be affected by the above proposal. A preliminary analysis indicates that Zimbabwe would meet the proposed end-2010 indebtedness criterion. Thus, the conditions laid out in paragraph 24 would continue to determine how Zimbabwe could become potentially eligible for HIPC Initiative relief.

39. Of the four countries that would remain potentially eligible, Nepal is a special case in that its external debt is deemed sustainable. Under the LIC DSF, Nepal is rated at moderate risk of debt distress, with external public or publicly guaranteed (PPG) debt at end- 2010 well below all relevant thresholds. However, the present value of the PPG debt-to- exports ratio exceeded 170 percent, and thereby the HIPC Initiative threshold of 150 percent, at end-2010 after the application of traditional debt relief mechanisms. This discrepancy stems from the large size of remittance flows to the Nepalese economy--remittances exceed 20 percent of GDP and are more than twice as large as exports of goods and services—and the different treatment of remittances in the DSF and the HIPC Initiative—remittances can be taken into account in the DSF, and are indeed reflected in Nepal’s debt sustainability assessments, but are not included in HIPC calculations in accordance with views previously expressed by the Boards (see Box 2). For Nepal, including remittances in the denominator of the PV of PPG debt-to-exports ratio would lower this ratio to below 60 percent.

Remittances in the Context of the HIPC Initiative

As originally laid out in the HIPC Initiative framework in 1996, it was envisaged that the denominator for the PV of debt-to-exports ratio would normally be limited to exports of goods and services as defined in the 5th edition of the Balance of Payments Manual.1 However, where workers’ remittances make a significant contribution to the country’s debt servicing capacity, such inflows were to be included in the denominator for the PV of debt-to-exports ratio. In 1997, the IMF and IDA Boards decided, given the absence of reliable data on remittances in most HIPCs, to exclude worker’s remittances.2

1 See "The HIPC Debt Initiative—Elaboration of Key Features and Proposed Procedures," Box 3, August 26, 1996.2 See "Summing Up by the Acting Chairman—Cap paper for the Preliminary HIPC Initiative Documents for Bolivia, Burkina Faso, Cote d’Ivoire, and Uganda," April 23,1997.

40. The staffs do not see a good case for modifying the framework of the HIPC Initiative to allow for the consideration of remittances in determining potential eligibility and qualification for assistance under the Initiative. While not as strong as in the 1990s, the rationale for excluding remittances from consideration in assessing a country’s debt servicing capacity—concerns about the unevenness of data availability and quality across countries—still has validity. Moreover, adding remittances to exports in the denominator of the debt-to-exports ratio, even if limited to cases for which remittances are large relative to the size of the economy, could have undesirable consequences, including possibly disqualifying from assistance countries that would qualify under current rules. It could also lower the amount of assistance to future HIPCs relative to what HIPCs that have already qualified have received, thereby violating, at least in spirit, the principle of uniformity of treatment. While it may be technically feasible to devise rules that would avoid giving rise to these undesirable consequences, such rules would be complex and lack transparency. In light of these serious drawbacks, the staffs do not favor such a major modification of the Initiative at this late stage, even though it would be appealing for the case of Nepal on economic grounds and have the corollary benefit of aligning the eligibility list with the wishes of the Nepalese authorities.

V. Issues for Discussion

  • Do Directors agree with the proposals for the further streamlining of reporting of progress under the initiatives, and for periodic reports on debt vulnerabilities in LICs, including HIPCs?

  • Do Directors agree with the proposals for the addition of income and indebtedness criteria for end-2010 to the HIPC Initiative framework and the further ring-fencing of the list of potentially eligible HIPCs based on these criteria?

  • Do Directors agree that introducing remittances into the HIPC Initiative framework at this late stage would not be appropriate?

Annex I. Assessing Remaining HIPCs against the Indebtedness Criterion at end-2010

Assessment of a country’s external debt against the HIPC Initiative’s indebtedness criterion at a particular point in time is data intensive Macroeconomic data is required on GDP, exports of goods and services, and central government revenue (excluding grants). On external public and publicly guaranteed debt, sufficiently detailed information is needed to allow the calculation of the present value of the debt, as well as the simulation of the application of traditional debt relief mechanisms. Ideally, loan-by-loan information should be used to arrive at precise estimates but, when this is not available, a close approximation can be obtained based on disaggregated data that separately identifies the debt service associated with pre-cutoff, post cutoff and non-ODA, ODA debt (see Annex II on methodological issues).

For all the seven countries remaining on the ring-fenced list based on end-2004 data, IMF and IDA staffs were able to obtain sufficiently detailed data to allow assessment against an end-2010 indebtedness criterion. The methodology used for the assessment is the same as was employed for the 2006 ring-fencing exercise.1 Full sets of loan-by-loan data were obtained for Nepal and Sudan, while partial sets were obtained for Eritrea and Somalia.2 For Bhutan, the Kyrgyz Republic, and Lao PDR, the respective authorities provided sufficiently disaggregated data based on a template provided by the staffs. Macroeconomic data, including on GDP, exports, and central government revenues, was obtained from the most recent IMF and World Bank country reports, as well as from country teams.

Based on the data collected, IMF and IDA staffs have determined that Eritrea, Nepal, Somalia, and Sudan met the end-2010 indebtedness criterion while Bhutan, the Kyrgyz Republic, and Lao PDR did not (Annex I Table 1):

  • For Bhutan, data provided by the authorities indicates that the PV of external public and publicly guaranteed (PPG) debt at end-2010 was 125 percent of exports of goods and services and 180 percent of central government revenue. Thus, Bhutan did not meet the HIPC Initiative threshold for either the export or fiscal windows at end-2010.

  • For Eritrea, estimates based on data on multilateral and Paris club debt indicate that the PV of external PPG debt was at least 596 percent of exports of goods and services at end-2010. Thus, Eritrea met the HIPC Initiative threshold for the export window at end-2010.

  • For the Kyrgyz Republic, data provided by the authorities indicates that the PV of external PPG debt at end-2010 was 75 percent of exports of goods and services and 184 percent of central government revenue. Thus, the Kyrgyz Republic did not meet the HIPC Initiative threshold for either the export or fiscal windows at end-2010.

  • For Lao PDR, data provided by the authorities indicates that the PV of external PPG debt at end-2010 was 113–117 percent of exports of goods and services and 236–246 percent of central government revenue.3 While the debt to revenue ratio was close to the HIPC Initiative threshold, the estimation of traditional debt relief covered only Paris Club debt, and therefore represented a lower bound for such relief. Thus, Lao PDR did not meet the HIPC Initiative threshold for either the export or fiscal windows at end-2010.

  • For Nepal, loan-by-loan data indicate that the PV of external PPG guaranteed debt was at 173 percent of exports of goods and services at end-2010. Thus, Nepal met the HIPC Initiative threshold for the export window at end-2010.4

  • For Somalia, estimates based on data on multilateral and Paris club debt indicate that the PV of external PPG debt was at least 410 percent of exports of goods and services at end-2010. Thus, Somalia met the HIPC Initiative threshold for the export window at end-2010.

  • For Sudan, loan-by-loan data indicate that the PV of external PPG debt was at 184 percent of exports of goods and services at end-2010. Thus, Sudan met the HIPC Initiative threshold for the export window at end-2010.5

Table AI.1

HIPCs’ End-2010 External Debt Relative to Exports and Revenue

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Source: IMF and IDA staff estimates.Memorandum items:Bhutan, the Kyrgyz Republic, and Lao PDR would not qualify for HIPC Initiative assistance based on end-2010 data, while Nepal, Eritrea, Somalia, and Sudan would.

The authorities were asked to provide sufficiently disaggregated data to allow the simulation of the application of TDRM. While the Laotian authorities provided data, it was insufficiently detailed to allow this.

TDRM stands for traditional debt relief mechanisms.

Based on data for multilateral and Paris Club creditors.

Range of estimates reflects stock flow discrepancies in data on commercial debt.

Based on data for multilateral and Paris Club creditors. No information is available on fiscal revenue.

Annex II. HIPC Initiative—Methodological Aspects Related to Determining HIPC Initiative Eligibility

Assessment of potential eligibility: A country is considered potentially eligible for debt relief under the HIPC Initiative if the following conditions are satisfied: (a) it is IDA-only and PRGT eligible and (b) its end-December 2004 debt burden indicators are above the thresholds established under the HIPC Initiative after full application of traditional debt relief mechanisms. The thresholds are 150 percent for the ratio of the present value of debt (PV) to exports of goods and services and 250 percent for the ratio of PV to fiscal revenue. To qualify under the second criterion a country must also have ratios of exports of goods and services to GDP and fiscal revenue to GDP above 30 percent and 15 percent, respectively.

Debt: Debt covered under the Initiative is limited to medium and long-term public and publicly guaranteed external debt with the following exceptions: short-term debt that has been in arrears for more than one year; private sector debt that has previously been covered by Paris Club agreements; debt of public enterprises (defined as at least 50 percent owned by the government) regardless of whether the debt is formally publicly guaranteed; and debt of public enterprises being privatized if that debt remains a liability of the government. Only disbursed and outstanding debt is considered: future disbursements are excluded even if they relate to existing commitments.

Debt Service: Debt service is projected on a loan-by-loan basis and reflects the disbursed and outstanding portion of the loans. When loans are repaid on a commitment basis, debt service is projected using the contractual repayment profile pro-rated by the disbursed amount.

Present Value: The PV is the discounted value of the projected debt service payments. It is used as the basis for calculating the amount of debt relief once full delivery of traditional debt relief is assumed. The currency-specific discount rates used under the HIPC Initiative are the average OECD Commercial Interest Reference Rates (CIRRs) calculated over the six-month period leading up to the cutoff date for the debt stock. For units of account from various multilateral creditors, the discount rate is the weighted average of the CIRRs for the currencies in the basket. The SDR discount rate is used for those currencies for which a CIRR is not available, unless they are formally pegged to a currency for which a CIRR is available, in which case the CIRR of the peg is used.

Traditional Debt Relief: This refers to a Paris Club stock-of-debt operation on Naples terms (with a 67 percent PV reduction on non-ODA debt) and action on at least comparable terms on other official bilateral and commercial debt. It is the basis for which qualification for debt relief is assessed in HIPC Initiative documents even when a country has never rescheduled its debts.

Cut-off date: The date (established at the time of a country’s first Paris Club rescheduling) before which loans must have been contracted in order for their debt service to be eligible for rescheduling. New loans extended after the cut-off date are not subject to future rescheduling. A June 1999 cut-off date (the effective date of the Cologne Agreement) is applied to countries that have not had a Paris Club rescheduling.

Official Development Assistance (ODA): ODA is defined by the OECD as credits (including grant and loan packages) (a) aimed at promoting economic development and welfare of developing countries and, (b) that are concessional in character and contains a grant element of at least 25 percent (using a fixed discount rate of 10 percent). ODA is provided to developing countries and to multilateral institutions by OECD/DAC members and other countries through their official agencies, including state and local governments, or by their executive agencies; ODA is also provided to developing countries by multilateral institutions. Excluded from this category and therefore considered non-ODA are defense related lending, lending on commercial terms and by export credit agencies.

Exports: The exports denominator corresponds to the three-year backward-looking average exports of goods and non-factor services, consistent with the IMF Balance of Payments Manual, 5th edition, 1993. The export base is gross and is not adjusted to reflect any netting out of imported inputs, debt service payments, etc. Worker’s remittances and transit trade (goods that cross frontiers without changing ownership) are excluded from the denominator.

Revenue: Revenue is defined as current central government revenue excluding grants. This is consistent with the objective of releasing government resources from external debt service, which in HIPCs is mostly undertaken by the central government, to spending in priority areas. Information on revenue on a wider basis is not available for most of these countries and use of a broad revenue base only when available would tend to penalize countries with better statistical systems.

Exchange rates: The PV of debt is converted from its currency-specific components into U.S. dollars using the exchange rates prevailing at the end of the base year for the debt stock. In cases where the balance of payments is presented in a currency other than the U.S. dollar, exports are converted to U.S. dollars using the average exchange rate for the corresponding year. The three year export average used as the denominator for the PV of debt-to-exports ratio is derived as a second step after annual exports have been converted into U.S. dollars. For the calculation of the PV of debt-to-revenue ratio, current central government revenue is converted into U.S. dollars using the average exchange rate for the year.

Annex III. 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 2010 debt data, the Kyrgyz Republic appears 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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Assessment of progress in more recent years continues to be constrained by the lack of data covering the years 2006, 2007, and 2008.

Table 3.

HIPC Completion-Point Countries: Progress towards Achieving the MDGs1

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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 so far with that needed to reach the MDG, under the assumption that progress becomes increasingly difficult the closer countries get to the goal. Technically, this is equivalent to comparing the annual growth rate between 1990 and today with the constant growth rate required to reach the MDG in 2015 from the situation in 1990.

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

Country Coverage

  • The costing analysis for the 36 post-decision-point countries includes: Afghanistan, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Côte d’Ivoire, Comoros, 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 3 HIPCs: Eritrea, Somalia, and Sudan.1

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 U.S. dollars per SDR was applied for the period FY07 – FY08. Cost estimates for FY09-FY11 (corresponding to the period covered by the IDA 15 replenishment round) are based on the IDA15 foreign exchange reference rate of 1.524480 U.S. dollars per SDR. Cost estimates for FY11 onward are based on the IDA16 provisional foreign exchange reference rate of 1.50233 U.S. 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 2010 was used.

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

Update of Cost Estimates in Present Value Terms

The cost of HIPC Initiative assistance calculated in PV terms at the time of the decision-point is discounted to end-2010 using the average interest rate applicable to the debt relief. This rate was estimated at 3.9 percent and corresponds to the implicit long-term interest rate of currencies that comprise the SDR basket over the period 2008–2010, 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-2010 PV terms.

Table 1.

Summary of Debt Service and Poverty Reducing Expenditures 2001–2015 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 2001–2010, and debt service due covers 2011–2015. 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, Chad, Ethiopia, the Gambia, Ghana, Guinea, Haiti, 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, 2001–2015

(In millions of U.S. dollars, unless otherwis e 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.

Data reported on a fiscal year basis.

Reached decision point in 2000.

Reached completion point in 2000.