I. Introduction

This is the fourth progress report on the implementation of the HIPC Initiative and PRSP program. The next progress report will be prepared for the Spring Meetings. Section II of the report provides an update of country progress in calendar year 2000. As requested by Executive Directors, Section III also sets out the staffs' work program through the 2001 Spring Meetings, drawn from the Executive Boards' work programs.

II. Progress in Implementing the HIPC Initiative and PRSP Program

There has been considerable progress since September 2000 in terms of the number of HIPC Initiative Decision Points achieved and countries which have begun the process of developing poverty reduction strategies. The following provides a summary. Detailed tables are in Annexes 1 (HIPC) and 2 (PRSP).

HIPC

A total of 22 countries reached their Decision Point under the enhanced HIPC Initiative by end-December 2000. Of these, 12 were brought forward during the last quarter of 2000.² A total of $20.3 billion of debt relief in NPV terms ($33.6 billion in nominal debt service relief) has been committed to these 22 countries under the HIPC Initiative. Combined with traditional debt relief and likely additional bilateral debt forgiveness, the HIPC Initiative will reduce the debt stock of the 22 countries by almost two-thirds from $53 billion in NPV terms to roughly $20 billion. Further details are in Annex 2.

HIPC assistance has achieved a major objective of lowering debt service payments in the countries that have reached their Decision Point. Debt service payments will be cut by one third on average from around $3 billion in 1998 and $2.5 billion in 1999 to $1.8 billion in 2001 and $1.9 billion in 2002. The ratio of debt service to exports will be cut from 20 percent in 1998 and 15 percent in 1999 to less than 10 percent in 2001and beyond. The fiscal burden will be reduced by one half over the same period.

The Bank and the Fund are making a substantial financial contribution to this effort. In total, debt service relief from IDA will amount to close to $8 billion and is expected to average $375 million a year over the next decade. All interim debt relief agreements provided by IDA have been signed and are effective. Average IDA debt service by the 22 HIPCs which have passed their Decision Point will be reduced by about two-thirds during the interim period. The IMF has committed $1.7 billion (NPV terms) for the 22 countries. The Fund has begun to disburse assistance to all countries except Honduras and Nicaragua, which are awaiting sufficient financing assurances from other creditors.

Good progress has also been made in financing the Initiative. Total pledges to the HIPC Trust Fund, administered by IDA, have reached $2.5 billion. Paid-in contributions are almost $1 billion. A key step forward in the last quarter was the US Congress's appropriation of $360 million to the Trust Fund, which will help the Inter America Development Bank, the Central America Bank for Economic Integration, and the African Development Bank meet their financing requirements. The US Congress also approved legislation allowing the IMF to use the balance of investment income generated from IMF gold sales (about $800 million) for the PRGF-HIPC Trust.

PRSP

At the time of the Annual Meetings, the Boards had considered 13 interim PRSPs and two full PRSPs (Burkina Faso and Uganda)³. Since the Annual Meetings, 16 countries have presented I-PRSPs to the two Boards, and two (Tanzania and Mauritania) full PRSPs. Three quarters of the interim strategies have been brought forward in connection with the HIPC Initiative. As expected, I-PRSPs have varied widely in terms of both content and process. All of them lay out a road map for developing the full poverty reduction strategy, which is the requirement for I-PRSPs. However, a few countries have gone beyond the minimum requirement and set out more detailed analyses of the poverty situation and have proposed specific reform measures. Some countries have also described existing participatory processes on which the I-PRSP was based.

III. Looking Ahead to the 2001 Spring Meetings

In the coming months we will increasingly focus on two issues—(1) supporting the development and implementation of high quality poverty reduction strategies in all low income countries, including HIPCs working towards their Completion Point; and (2) bringing the remaining eligible HIPCs forward to their Decision Point, wherever possible.

Substantial Bank and Fund staff resources will be needed to assist governments with the process and content of their poverty reduction strategies. As many as 25 countries—18 of them HIPCs—are planning to produce full PRSPs, embodying the principles of the Comprehensive Development Framework (CDF), in 2001. For the HIPCs, the successful implementation for one year of a full PRSP will be the main requirement for reaching the Completion Point under the Initiative, which brings with it irrevocable debt relief.⁴ For other countries, the PRSP will determine their access to Bank and Fund concessional lending. The challenge for the Bank and Fund will be to support countries to build effective poverty reduction strategies, developed through broad-based participation, to adapt our programs in the light of these strategies, and as we do so, to improve the division of labor between the institutions—each focusing on its areas of core competence.

To that end, staff will focus on a number of key issues in the first half of 2001:

Supporting Countries' Poverty Reduction Strategies

• Providing guidance to staff as they assist countries' development of PRSPs. Guidelines to staff on the core content of the joint staff assessment of full PRSPs are being prepared and will be sent to the Boards for information in early March. A series of staff training events and seminars are also underway to help build experience and cross-country learning.

• Developing a common framework for more systematic assessment of the poverty and social impact of major policy changes. Poverty and social impact analyses of the policy measures underpinning poverty reduction strategies are critical to ensuring that the potential effects on the poor and vulnerable groups are taken into account in program design. Ideally, these analyses should be done during a country's preparation of its PRSP, when the government will be drawing together a participatory assessment of the poverty impact of its whole strategy with support from partners. In addition to support for these efforts, our priority will be to consider how the poverty and social impact assessment of major policy changes supported by the PRGF and by Bank adjustment operations can be carried out on a systematic basis in the future, taking into account internal resource constraints. Progress will be set out in the HIPC/PRSP progress report for the Spring Meetings.

• Improving the division of labor between IDA and PRGF support. As the Bank and Fund adapt our financial support to countries' poverty reduction strategies, an important objective will be for each institution to focus on its primary areas of responsibility and competence. This effort will be taken forward through more streamlined conditionality of the PRGF and the Bank's development of PRSCs. This issue will be covered in the HIPC/PRSP progress report for the Spring Meetings.

• Strengthening collaboration with development partners supporting countries' PRSPs. Staff plan joint consultations with key partners to agree practical ways to enhance aid cooperation using the PRSP as the framework. An early priority will be to work out the modalities of collaboration with the EU, which has decided to base its assistance to the Africa, Caribbean and Pacific region on the PRSP framework. A Bank/Fund/ EU workshop took place in Washington on January 23-25, following a similar event in Brussels in September 2000.

Extending HIPC Initiative Debt Relief

• Working towards mechanisms to track poverty related-expenditure in low income countries, building on the work initiated for HIPCs in 2000. Both institutions, with other donors, will need to step up efforts to help countries improve their public expenditure management systems and their capacity to track poverty-related spending. A preliminary assessment of the capacity of 25 HIPCs to track their poverty related spending—presented at an informal Board briefing on December 7—revealed a need for substantial capacity upgrading and enhanced technical assistance in most countries. We shall now shift our attention to undertaking public expenditure management assessments and technical assistance programs based on these evaluations. A joint Bank/Fund paper setting out early actions to strengthen capacity was discussed by the Boards in February 2001.

• Analyzing the challenge of maintaining debt sustainability faced by countries benefiting from the HIPC Initiative. The immediate task is to determine how countries should be treated at the Completion Point, if their debt ratios exceed HIPC Initiative thresholds and to develop policies on new financing for HIPCs. A further, broader issue is to outline actions that can be taken by HIPC countries and by their development partners to ensure continued overall debt sustainability in the light of their development and financing strategies. A paper on these issues is due to be discussed by the Boards in March.

• Extending HIPC Debt Relief. Progress in 2001 in bringing further countries to their HIPC Initiative Decision Point will be more gradual and difficult than in 2000. In particular, there remains a large group of potential HIPC countries which are affected by conflict, protracted arrears, and performance problems linked to weak governance. Before the Spring Meetings, Bank and Fund staff will present to the Boards papers on assistance to post-conflict countries that will outline possible actions on the HIPC and arrears issues. As these countries begin to advance to their Decision Point additional resources will need to be mobilized to finance their debt relief, as funding has not been fully secured.