HIPC debt relief

HIPCs are Highly Indebted Poor Countries. 
A group of 40 developing countries are classified as being the heavily indebted poor countries. This includes, according to the IMF and World Bank definition, 32 countries with a 1993 GNP per capita of US$695 or less and 1993 present value of debt to exports higher than 220 percent or present value of debt to GNP higher than 80 percent.  

It has been well recognized that the external debt situation for a number of low-income countries, mostly in Africa, has become extremely difficult. For these countries, even full use of traditional mechanisms of rescheduling and debt reduction - together with continued provision of concessional financing and pursuit of sound economic policies - may not be sufficient to attain sustainable external debt levels within a reasonable period of time and without additional external support. 

In September 1996, the Interim and Development Committees of the IMF and the World Bank endorsed a program jointly proposed by the two institutions to address this situation. The Initiative for the "Heavily Indebted Poor Countries" (HIPC Initiative) is designed to provide exceptional assistance to eligible countries following sound economic policies to help them reduce their external debt burden to sustainable levels. That is, to levels that will comfortably enable them to service their debt through export earnings, aid, and capital inflows. This assistance will entail a reduction in the net present value (NPV) of the future claims on the indebted country. Such assistance will help to provide the incentive for investment and broaden domestic support for policy reforms. 

The situation September 2000
During the last years, the donor countries, IMF and the World Bank repeatedly have been criticized for moving to slowly on the HIPC dept relief. By September 2000, US$ 17 billion in debt relief had been committed to 12 countries, with relief already flowing to 10 of these countries under the enhanced initiative. Work is well underway to have agreements in place for a total of 20 countries by the end of the 2000, for combined debt relief of more than US$ 30 billion.

Though the World Bank and the IMF declare themselves satisfied with this process, there is widespread disappointment with the speed of the implementation. Rhetoric about a debt reduction that would make a difference also has lead to disappointment. However, the process seams to have gained momentum by the end of 2000, and it is expected that the implantation will speed up.

The HIPC debt relief initiative
The HIPC Initiative was launched by the IMF and World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced Initiative aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors). 

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Thirty-six countries are expected to qualify for assistance under the enhanced HIPC Initiative, of which 29 are sub-Saharan African countries. So far, 16 countries have been reviewed under the enhanced framework, for packages amounting to some US$25 billion in debt service relief over time. Eight countries have now reached their decision point under the enhanced framework (Burkina Faso joins Bolivia, Honduras, Mauritania, Mozambique, Senegal, Tanzania and Uganda), with total committed assistance estimated at roughly US$15 billion, representing an average NPV stock-of-debt reduction of about 45 percent on top of traditional debt relief mechanisms. In addition, in the coming days Benin is expected to qualify for assistance under the enhanced HIPC framework.

Implementing the HIPC Initiative 
Rapid progress has been made by the international financial community in implementing the HIPC Initiative since it was endorsed by the Interim and Development Committees of the IMF and World Bank in September 1996. Under the original framework, the Executive Boards of the World Bank and the IMF had considered twelve countries for eligibility under the HIPC Initiative and had agreed to extend assistance to seven. The IMF's website provides a summary of status of implementation of the Initiative, with detailed country-specific information. 

Including the retroactive cases, it is expected that by end-2000 potentially up to 20 countries could reach their respective decision point under the enhanced Initiative. However, the actual timing will depend on progress in performance under reform programs and in preparation of their (interim) PRSPs. Over the coming year, countries which are expected to reach their completion point are Bolivia (under the enhanced framework), and Burkina Faso, and Mali (under the original framework). In 2000, decision points under the enhanced HIPC framework could be reached for Benin, Cameroon, Chad, Côte d'Ivoire, Guinea, Guinea-Bissau, Guyana, Honduras, Malawi, Nicaragua, Rwanda, Senegal, and Zambia. In addition, a preliminary discussion could be held for Niger. Not all countries are expected to require assistance. Ghana and Laos have indicated that they do not wish to pursue HIPC Initiative assistance. 

In July 2000, the European Union announced its contribution of US$ 950 million (more than EUR 1 Billion) toward implementation of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The majority of the contribution, EUR 734 million, is directed to the HIPC Trust Fund, which is used to help finance the debt relief costs of participating multilateral creditors. This contribution by the EU is the single largest, equaling roughly one-third of the total amount pledged to date by all donors. The EU also leads in terms of payments. Under the agreement signed in Brussels on July 7 by EU Commissioner for Development Cooperation and Humanitarian Aid Poul Nielson, more than EUR 300 million is being made available immediately to the Trust Fund, which can be used for the continuing financial implementation of the enhanced HIPC Initiative. Of the more than EUR 1 billion contribution, EUR 680 million are directed to the Trust Fund to help multilateral creditors provide debt relief to HIPCs which are members of the Africa, Caribbean and Pacific (ACP) arrangement with the EU. Another EUR 54 million will be made available to the Trust Fund for countries in Latin America and Asia which are not ACP members. And EUR 348 million will be used to reduce debt owed directly to the EU. 

In noting the EU's decisive move, Nielson stressed the need for all donors to follow suit if continued progress is to be assured. "I now urge others to pay into this Trust Fund. This is a start-but financing will only be secured if other donors now rapidly contribute to the Fund. We must move to actual payments and build on this momentum." On 11 July 2000, United Nations Secretary-General Kofi Annan said it was time rich nations fulfilled promises of debt relief to poor countries. The European Commission shares the UN Secretary-General's concern that 40 percent of African public revenues are now being allocated to service debt: "I agree this is clearly to the detriment of health, education and other essential social services", says Poul Nielson, European Commissioner for Development Co-operation and Humanitarian Aid. 

In a letter to the G8 industrial nations meeting in Okinawa, Japan, from July 21 to 23, UN Secretary-General Annan also has proposed that eligibility requirements for the HIPC plan should be relaxed so that countries like Nigeria could apply for debt relief, and that debts owed by countries that have suffered major conflicts or natural disasters should be cancelled. 

Source: IMF, World Bank, European Union

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