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A Factsheet - March 2008

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

What is the Heavily Indebted Poor Countries (HIPC) Initiative?

The HIPC Initiative was first 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. The Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. Following a comprehensive review in 1999, a number of modifications were approved to provide faster, deeper, and broader debt relief and to strengthen 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 International Development Association (IDA) of 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 debt relief to the five HIPCs in the Western Hemisphere.

However, the HIPC Initiative, even supplemented by the MDRI, is not a panacea. Even if all of the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt-service payments for many years.

How the HIPC Initiative works

To be considered for HIPC Initiative assistance, a country must: (1) be IDA-only and PRGF-eligible; (2) face an unsustainable debt burden, beyond traditionally available debt-relief mechanisms; (3) establish a track record of reform and sound policies through IMF- and IDA-supported programs; and (4) have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process. Once a country has met or made sufficient progress in meeting these criteria, the Executive Boards of the IMF and IDA formally decide on its eligibility for debt relief, and the international community commits to reducing debt to the agreed sustainability threshold. This is called the decision point. Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due. In order to receive the full and irrevocable reduction in debt available under the HIPC Initiative, however, the country must: (i) establish a further track record of good performance under IMF- and IDA-supported programs; (ii) implement satisfactorily key reforms agreed at the decision point, and (iii) adopt and implement the PRSP for at least one year. Once a country has met these criteria, it can reach its completion point, at which time lenders are expected to provide the full debt relief committed at decision point.

Who receives HIPC Initiative assistance

Forty-one countries have been found to be eligible or potentially eligible for HIPC Initiative assistance. Twenty-three countries have already reached their completion points and have received or are receiving irrevocable debt relief from the IMF and other creditors. Ten countries have reached their decision points and are receiving interim HIPC Initiative debt relief. Eight countries, which have been identified as potentially eligible for HIPC Initiative assistance, have not yet reached their decision points.

How the HIPC Initiative is financed

The total cost of providing assistance to the 41 countries that have been found eligible or potentially eligible for debt relief under the enhanced HIPC Initiative is estimated to be about US$68 billion in end-2006 net present value terms.¹ About half of this will be provided by bilateral creditors, and the rest will come from multilateral lenders. The IMF's share of the cost is financed primarily by the investment income on the net proceeds from off-market gold sales in 1999 that were deposited to the IMF's PRGF-HIPC Trust. Additional contributions to this trust have been provided by member countries.

How countries have benefited from the HIPC Initiative

For the 33 countries for which packages have already been approved, debt service paid, on average, has declined by about 2 percent of GDP between 1999 and 2006. Yet for debt reduction to have a tangible impact on poverty, the additional resources need to be targeted at the poor. 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 and, on average, such spending is about five times the amount of debt-service payments.

While country-by-country data demonstrate that these countries are seeing clear gains, it has taken time and effort to ensure that money is redirected to help the poor in ways that most reduce poverty. And difficult problems remain. For example, in countries ravaged by war or natural disasters, pressing reconstruction needs may mean large new loans at the same time that old debt is being reduced. Other countries face challenges to meet the criteria for reaching the decision point due to uneven policy records or poor governance resulting from civil conflict. Finally, some countries (such as Somalia and Sudan) have very large debts and are running arrears to various creditors that will require additional funding for the Initiative.

Maintaining a sustainable debt position while seeking the additional financing needed to make progress toward the MDGs remains a serious challenge, even after debt relief under the HIPC Initiative. The IMF and World Bank are looking for solutions, with poverty reduction as the central focus.

Who has delivered its share of HIPC Initiative debt relief

Delivery of HIPC Initiative debt relief varies across creditors. Most multilateral creditors have been delivering HIPC Initiative debt relief. The IMF, the World Bank, AfDB Group, and IaDB continue to provide interim relief after HIPCs reach their decision point and the remainder of the debt relief once they reached completion point.

Almost all Paris Club creditors have started delivering HIPC Initiative debt relief once the HIPCs have reached their decision point. These creditors provide debt relief beyond what was committed under the HIPC Initiative, by fully cancelling eligible debts after a country reaches its completion point.

About 60 percent of the non-Paris Club official creditors have granted HIPC Initiative debt relief. The IMF and the World Bank estimate that these creditors have delivered between 34 and 39 percent of the relief expected under the Initiative. According to information provided by debtors, 21 non-Paris Club official bilateral creditors have not yet delivered any HIPC Initiative debt relief.. Information identifying the HIPC Initiative debt relief granted by each non-Paris Club creditors has been published on the IMF’s and Bank’s websites (Delivery of Debt Relief by Non-Paris Club Creditors). The low delivery of debt relief by these creditors has been attributed to political and legal constraints, and an insufficient understanding of the HIPC Initiative framework.

The delivery of debt relief by commercial creditors has also been low. Furthermore, a growing number of commercial creditors have initiated litigations against HIPCs challenging the implementation of the HIPC Initiative.

How participation in the HIPC Initiative could be encouraged further

In view of the voluntary nature of creditor participation in the HIPC Initiative, the IMF and the World Bank will continue to use moral suasion to encourage creditors to participate in the Initiative and to deliver fully their share of HIPC Initiative debt relief. The IMF and World Bank will also continue to gather more information to better assess and monitor the delivery of HIPC Initiative debt relief. The IMF will address issues related to the participation in the HIPC Initiative during its regular consultations and other missions to creditor countries.