Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative

November 3, 2017

The joint IMF–World Bank comprehensive approach to debt reduction is designed to ensure that no poor country faces a debt burden it cannot manage. To date, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time. Three additional countries are eligible for HIPC Initiative assistance.

Debt relief key to poverty reduction

The HIPC Initiative was launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. Since then, the international financial community, including multilateral organizations and governments, have worked together to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries.

In 1999, a comprehensive review of the Initiative allowed the Fund to provide faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction, and social policies.

In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI) . The MDRI allows for 100 percent relief on eligible debts by three multilateral institutions—the IMF, the World Bank, and the African Development Fund (AfDF)—for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank (IaDB) also decided to provide additional (“beyond HIPC”) debt relief to the five HIPCs in the Western Hemisphere.

Two-step process

Countries must meet certain criteria, commit to poverty reduction through policy changes, and demonstrate a good track record over time. The Fund and Bank provide interim debt relief in the initial stage and, when a country meets its commitments, full debt relief is provided.

First step: decision point. To be considered for HIPC Initiative assistance, a country must fulfill the following four conditions:

1) Be eligible to borrow from the World Bank’s International Development Agency, which provides interest-free loans and grants to the world’s poorest countries, and from the IMF’s Poverty Reduction and Growth Trust, which provides loans to low-income countries at subsidized rates;

2) Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms;

3) Have established a track record of reform and sound policies through IMF- and World Bank–supported programs ; and

4) Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in the country.

Once a country has met or made sufficient progress in meeting these four criteria, the Executive Boards of the IMF and World Bank formally decide on its eligibility for debt relief, and the international community commits to reducing debt to a level that is considered sustainable. This first stage under the HIPC Initiative is referred to as the decision point. Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due.

Second step: completion point. In order to receive full and irrevocable reduction in debt available under the HIPC Initiative, a country must

1) Establish a further track record of good performance under programs supported by loans from the IMF and the World Bank;

2) Implement satisfactorily key reforms agreed at the decision point; and

3) Adopt and implement its PRSP for at least one year.

Once a country has met these criteria, it can reach its completion point, which allows it to receive the full debt relief committed at the decision point.

Countries receiving debt relief. Of the 39 countries eligible or potentially eligible for HIPC Initiative assistance, 36 are receiving full debt relief from the IMF and other creditors after reaching their completion points. Three countries, which have been identified as potentially eligible for HIPC Initiative assistance, have not yet reached their decision points.

Debt relief frees up resources for social spending

Debt relief is one part of a much larger effort, which also includes aid flows, to address the development needs of low-income countries and make sure that debt sustainability is maintained over time. For debt reduction to have a tangible impact on poverty, the additional money needs to be spent on programs that benefit the poor.

Boosting social spending. Before the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health and education combined. Now, they have increased markedly their expenditures on health, education, and other social services. On average, such spending is about five times the amount of debt-service payments.

Reducing debt service. For the 36 countries receiving debt relief, debt service paid has declined by about 1.5 percentage points of GDP between 2001 and 2015.

Improving public debt management. Debt relief has markedly improved the debt position of post–completion point countries, bringing their debt indicators down below those of other HIPCs or non-HIPCs. However, many remain vulnerable to shocks, particularly those affecting exports, as seen during the global economic crisis. To reduce their debt vulnerabilities decisively, countries need to pursue cautious borrowing policies and strengthen their public debt management.

IMF debt relief complemented by other sources

About 44 percent of the funding comes from the IMF and other multilateral institutions, and the remaining amount comes from bilateral creditors.

List of Countries That Have Qualified for, are Eligible or Potentially Eligible, and May Wish to Receive HIPC Initiative Assistance (as of October 2017)

Post-Completion-Point Countries (36)

Afghanistan

Ethiopia

Mauritania

Benin

The Gambia

Mozambique

Bolivia

Ghana

Nicaragua

Burkina Faso

Guinea

Niger

Burundi

Guinea-Bissau

Rwanda

Cameroon

Guyana

São Tomé & Príncipe

Central African Republic

Haiti

Senegal

Chad

Honduras

Sierra Leone

Comoros

Liberia

Tanzania

Republic of Congo

Madagascar

Togo

Democratic Republic of Congo

Malawi

Uganda

Côte d’Ivoire

Mali

Zambia

Pre-Decision-Point Countries (3)

Eritrea

Somalia

Sudan