Wednesday, December 7, 2011

Report Highlights Progress on Debt Relief in Highly Indebted Poor Countries,but Challenges Remain

IDA.IMF.World Bank.Press Release No:2012/190/PREM. WASHINGTON, December 7, 2011. A joint World Bank-IMF report released today shows significant progress in reducing the debt burdens of some of the world’s poorest countries.

The report, Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) –Status of Implementation and Proposals for the Future of the HIPC Initiative, shows that 36 out of 40 HIPCs have reached the debt relief decision point, the stage in which they qualify for debt relief, and 32 of them have reached the completion point, where debt is irrevocably cancelled, and also benefited from debt relief under the MDRI.

“These initiatives have been successful --there’s been a lot of progress on debt relief for very poor countries,” said Jeffrey D. Lewis, World Bank Director for Economic Policy and Debt. “Debt burdens have been lowered and more resources made available to fight poverty.”

The report, which was discussed by Board of Executive Directors of the World Bank and the Board of the IMF last week, notes that debt relief under the initiatives to the 36 post-decision point countries represents almost 35 percent of their 2010 GDP. Together with debt relief under traditional mechanisms and additional 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. In addition, poverty reducing spending increased by more than three percentage points of GDP, on average, between 2001 and 2010, while debt service payments declined.

Nevertheless, some challenges remain. Progress toward the Millennium Development Goals (MDGs) has been uneven -- only a quarter of completion point HIPC countries are on track to meeting the MDG1 to eradicate extreme poverty and hunger. Other challenges include providing debt relief to countries that are still at the pre-decision point stage, encouraging full participation of all creditors, ensuring the full financing of both HIPC and the MDRI, and addressing the issue of commercial creditor litigation.

In addition, the report recommends streamlining future reporting on debt relief and modifying the requirements for eligibility by adding end-2010 income and indebtedness criteria. With this modification, endorsed by the Board, countries like Eritrea, Somalia and Sudan would be able to access debt relief on a timetable suitable to their individual circumstances, while others like Bhutan, the Kyrgyz Republic, and Lao PDR would no longer be eligible, reflecting their improved debt outlook and decision not to pursue HIPC debt relief options.

The total cost of already committed HIPC Initiative debt relief to creditors is estimated at US$76 billion in end-2010 present value (PV) terms, while the total cost of the MDRI for the four participating multilateral creditors is estimated at US$33.8 billion in end-2010 PV terms.

The HIPC Initiative was launched by the World Bank and IMF in 1996 as a comprehensive effort to help the world's poorest, most heavily-indebted countries. It was enhanced in the fall of 1999 to provide for faster, deeper, and broader debt relief. The MDRI followed in 2005 to further reduce the debts of qualifying low-income countries and provide them with additional resources to help meet the Millennium Developments Goals (MDGs). Under the MDRI, four multilateral institutions, including the IMF and the World Bank, provide 100 percent debt relief on eligible claims of countries that reach the completion point under the enhanced HIPC Initiative.


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.

Although some challenges remain, the objectives of the HIPC Initiative have largely been reached:

As a result of progress in the last few years, 36 out of 40 HIPCs have reached the decision point, and 32 have reached the completion point and also benefited from debt relief under the MDRI, the last two, Guinea-Bissau and Togo, in December 2010.

Of the four countries between the decision and completion points (―interim HIPCs‖)—Comoros, Cote d’Ivoire and Guinea are expected to reach their respective completion points within the next 15 months, while prospects for Chad remain uncertain.

Only three potentially eligible countries—Eritrea, Somalia and Sudan—are yet to start the process of qualifying for debt relief under the Initiative (i.e. they are pre-decision point countries).

Four additional countries remain potentially eligible for HIPC debt relief. For Bhutan, Lao PDR and Nepal, their governments have indicated that they did not wish to avail themselves of HIPC Initiative assistance. While the government of the Kyrgyz Republic has not fully clarified its willingness to avail itself of debt relief under the initiatives, its external debt burden is assessed to be well below the HIPC qualification thresholds.
Some issues require continued attention in order to implement the initiatives fully:

Some of the eight countries that have not yet reached the completion point and, particularly the pre-decision-point HIPCs, face especially difficult challenges.

Overcoming these challenges will require sustained domestic efforts and continued support from the international community.

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

Additional funds will be needed to provide debt relief to the few HIPCs having protracted arrears to international financial institutions.

The incidence of litigation against HIPCs, albeit diminished in recent years, can be costly for HIPCs. National and multilateral initiatives have sought to respond to the risks associated with creditor litigation. In addition, by helping settle commercial creditors’ claims on HIPCs, the IDA-managed Debt Reduction Facility (DRF) has also helped reduce the risk of litigation.

While recognizing the need to continue monitoring the implementation of the initiatives, IMF and IDA staffs propose further streamlining HIPC Initiative and MDRI progress reporting, with updated information regularly posted on the IMF and World Banks websites rather than in an annual status of implementation report. While there are few indications of a significant intensification of debt vulnerabilities among LICs over the last 18 months, one-third of LICs and one-quarter of HIPCs face high debt vulnerabilities. To monitor the development of debt vulnerabilities in LICs, the staffs propose the preparation of periodic joint IMF-World Bank reports on debt vulnerabilities in LICs, including HIPCs.

The HIPC Initiative was not intended to be a permanent mechanism to relieve the external debts of LICs and 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.
As the HIPC Initiative has largely achieved its objectives, now is an opportune time for the IMF and IDA Executive Boards to consider options for its future. At informal sessions of the Boards in late February and early March, two options for the future of the HIPC Initiative appeared to have the most support: (i) maintaining the Initiative as it is; and (ii) modifying the framework by adding end-2010 income and indebtedness criteria for eligibility and further ring-fencing potentially eligible countries.

Under the latter option, three countries—Bhutan, the Kyrgyz Republic, and Lao PDR—would not meet the indebtedness criterion at end-2010, while four—Eritrea, Nepal, Somalia, and Sudan—would. This option, which IMF and IDA staffs propose be implemented, would reduce moral hazard. With the exception of Nepal, it would also be aligned with the wishes of countries whose governments have indicated that they do not wish to avail themselves of debt relief under the initiatives.