Debt relief to help fight poverty

In June 2005, the Group of 8 (G-8) major industrial countries proposed that three multilateral institutions—the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF)—cancel 100 percent of their debt claims on countries that have reached, or will eventually reach, the completion point—the stage at which a country becomes eligible for full and irrevocable debt relief—under the joint IMF-World Bank enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

The HIPC Initiative entailed coordinated action by multilateral organizations and governments to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. The MDRI goes further by providing full debt relief to free up additional resources to help these countries reach the MDGs. Unlike the HIPC Initiative, the MDRI does not propose any parallel debt relief on the part of official bilateral or private creditors, or of multilateral institutions beyond the IMF, IDA, and the AfDF.

However, in early 2007, the Inter-American Development Bank also decided to provide similar debt relief to the five HIPCs in the Western Hemisphere.

Track record in fighting poverty

All countries that reach the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative), and those with per capita income below $380 and outstanding debt to the Fund at end-2004, are eligible for the MDRI. To qualify for debt relief, the IMF Executive Board also requires that these countries be current on their obligations to the IMF and demonstrate satisfactory performance in:

• macroeconomic policies
• implementation of a poverty reduction strategy
• public expenditure management.

See Table 1 for a list of eligible countries. The table also lists the 35 HIPCs and 2 non-HIPCs that have already received MDRI relief.

IMF finances debt relief

Although the MDRI is an initiative common to several international financial institutions, the decision to grant debt relief is ultimately the separate responsibility of each institution, and the approach to coverage and implementation may vary.

In deciding to implement the MDRI, the IMF Executive Board modified the original G-8 proposal to fit the requirement, specific to the IMF, that the use of the IMF’s resources be consistent with the principle of uniformity of treatment. Thus, it was agreed that all countries with per-capita income of $380 a year or less (whether HIPCs or not) will receive MDRI debt relief financed by the IMF’s own resources through the MDRI-I Trust. HIPCs with per capita income above that threshold will receive MDRI relief from bilateral contributions administered by the IMF through the MDRI-II Trust.
MDRI relief covers the full stock of debt owed to the IMF at end-2004 that remains outstanding at the time the country qualifies for such relief. There is no provision for relief of debt disbursed after January 1, 2005.

Billions in relief delivered to countries

The total cost to the IMF of MDRI debt relief is estimated at about $3.4 billion in nominal terms as of February 28, 2013. In addition, the IMF delivered to Liberia beyond-HIPC debt relief amounting to $172 million on June 30, 2010.

Additional financing will be needed to cover the cost of the HIPC Initiative and any beyond-HIPC debt relief when eligible countries with protracted arrears to the IMF are ready to embark on the HIPC Initiative. In this context, the G-8 committed that donors will provide the extra resources necessary for full debt relief for these countries.
The G-8 has committed to ensure that the debt forgiveness under the MDRI neither undermines the ability of the three multilateral institutions to continue to provide financial support to low-income countries, nor the institutions overall financial integrity.

Follow-up and monitoring

The IMF and the World Bank are cooperating closely in the implementation and monitoring of the MDRI, particularly when it comes to assessing qualification for MDRI relief and monitoring MDG-related spending after debt relief has been provided. The first progress report on the IMF’s implementation of the MDRI was presented to the IMF Board in April 2006. Given that most HIPCs have reached the completion point, in November 2011, the IMF and IDA Boards endorsed staff’s proposal to further streamline reporting of progress under the HIPC Initiative and MDRI. It was agreed that the annual HIPC Initiative/MDRI status of implementation report will be discontinued, while the core information—on debt service and poverty reducing expenditure, the cost of debt relief, creditor participation rates, and litigation against HIPCs—should continue to be made available and updated regularly on the IMF and World Bank websites. The latest statistical update can be found here.

Table. Country Coverage of the MDRI