Prepared by the Staffs of the IMF and World Bank
See also Public Information Notice (PIN) No. 99/76
I. INTRODUCTION AND PRINCIPLES FOR CHANGE
1. In April, the Executive Boards of the Bank and the Fund discussed papers prepared by Bank and Fund staff that provided a broad summary of the proposals for changing the HIPC Initiative arising from the first phase of the consultation process.1 Executive Directors welcomed the joint statement by the President of the Bank and the Managing Director of the Fund and expressed general support for the principles for change and the general approach set out in that statement.2 The Interim and Development Committees endorsed these principles and called for the development of specific proposals to strengthen the Initiative. Subsequently, staffs have continued the consultative process. At the G-7 summit in Cologne in June, government leaders endorsed a number of specific suggestions of their finance ministers to provide "faster, deeper and broader debt relief for the poorest countries that demonstrate a commitment to reform and poverty alleviation",3 which are summarized in Annex 1.
2. In light of these discussions, this paper builds on and modifies the current HIPC Initiative framework,4 making a number of specific proposals to strengthen the Initiative that are consistent with the principles for change set forth by the President and Managing Director in their April reports to the Interim and Development Committees,5 namely:
3. In line with the preceding, the proposed modifications include deeper assistance through lower sustainability targets and through the calculation of assistance based on decision point data rather than the current completion point projections (Section II.A); earlier assistance through interim assistance, floating completion points, the front-loading of debt relief after the completion point (Section II.B), and broader assistance to benefit more countries (Section II.C). Implementation arrangements are discussed in Section III as they concern debt sustainability analysis (DSA), delivery profile of assistance, performance, retroactivity, and participation by all relevant creditors. Cost estimates for the proposed enhanced Initiative are provided in Section IV, followed by Section V that puts HIPC Initiative debt relief in the context of a broader approach to poverty reduction and sustainable development. Finally, Section VI lists possible issues for discussion.
4. Companion papers (to be issued shortly) will discuss the financing of the Bank's and the Fund's shares of the costs under such a strengthened HIPC Initiative. Work is under way on a paper that will discuss the links between debt relief, social development and poverty reduction in recipient countries, which will be presented for discussion by the Boards in late August/early September. As an input into this preparation, conferences on this topic will be hosted by the US Government on July 26, 1999, by UNECA in Addis Ababa on July 29-30, 1999, and by the Commonwealth Secretariat in London on August 2-3, 1999.
A. Deeper Debt Relief
5. The Development and Interim Committees voiced concerns that the target ranges under the Initiative may not provide a sufficient safety cushion to ensure a robust exit to debt sustainability. These concerns, which were also expressed in the course of the HIPC Initiative review, have been heightened by the significant declines in primary commodity prices and the still uncertain outlook for aggregate aid flows.
6. Staffs propose changes in the HIPC Initiative framework that aim at deepening the debt relief and would thereby:
Lower debt sustainability targets
8. It is proposed to lower the sustainability target for the NPV debt-to-exports ratio from the present range of 200-250 percent to a single target of 150 percent. This would increase assistance and widen the circle of countries that would be eligible for assistance under the Initiative. A single point target would also simplify the implementation of the Initiative compared to the current target range, eliminating the setting of individual targets—based on country-specific vulnerabilities—for each HIPC.
9. It is proposed also to lower the sustainability target for the NPV debt-to-revenue ratio from 280 percent to 250 percent, and to lower the thresholds for countries to qualify for assistance under the fiscal window: for the openness criterion from exports of 40 percent of GDP to 30 percent, and for the revenue threshold from 20 percent of GDP to 15 percent. The maintenance of these thresholds—albeit at reduced levels—is recommended to avoid moral hazard related to revenue collection and to ensure that the fiscal window remains targeted to open economies where the NPV debt-to-export ratio may understate the overall debt burden.
10. For countries qualifying under the fiscal window, the target NPV of debt would be the lower of 250 percent of central government revenues or 150 percent of exports, to ensure that external debt sustainability is achieved from both external and fiscal perspectives. Therefore, the resulting NPV debt-to-export ratio could be below 150 percent. With the proposed changes, the NPV debt-to-GDP ratio for a country with a revenue effort of 15 percent of GDP qualifying under the fiscal window could be reduced to 37.5 percent, i.e. a third lower than under the current framework.
Fixing HIPC Initiative debt relief as of the decision point
11. The amount of assistance committed under the current HIPC Initiative framework is calculated at the decision point, but is based on projected data for the completion point. The staffs propose changing this procedure to base the calculation of HIPC Initiative assistance on actual data at the decision point.6 This would have a number of advantages. It would simplify the implementation of the Initiative by avoiding the use of projected data. This would reduce uncertainty regarding the amount of assistance.7 8 Also, the amount of assistance would no longer be affected by the length of the second stage. This would provide financial neutrality with respect to the choice of completion points.
12. Such a change in the assessment date, if combined with unchanged sustainability targets, would tend to increase HIPC Initiative assistance. For most HIPCs, the NPV of debt-to-exports and to-revenue ratios tend to decline over time as exports and revenues rise faster than external debt. Thus, with the same target ratio, the assessment of assistance on the basis of actual data available at the decision point would provide deeper debt relief, and the benefits of export and central government revenue growth after the decision point would accrue fully to the debtor country.
13. Calculations based on actual data at the decision point would avoid the complication under the current framework that provision of interim assistance can affect the outcome against the agreed completion point targets.9 Such a change in the assessment base would facilitate the provision of earlier debt relief in support of a HIPC's economic and social reform programs.
B. Earlier Assistance
14. The original focus of the HIPC Initiative was on removing the debt overhang and providing a permanent exit from the rescheduling process. HIPC debt relief can also be used to free up resources for higher social spending aimed at poverty reduction to the extent that cash debt-service payments are reduced. The provision of more debt relief as a result of the proposed lower targets and fixing debt relief as of the decision point will permit these twin objectives to be achieved to a greater extent. In order to strengthen the linkage between debt relief and poverty reduction, the staffs set out below a number of proposals to speed up delivery of assistance under the Initiative through interim assistance from multilateral institutions, floating completion points, and front-loading of debt relief after the completion point. Front-loading of assistance—both through interim relief and through the profile of delivery of assistance after the completion point—would, of course, need to be always consistent with the objective of medium-term debt sustainability. As will be discussed in more detail in the forthcoming papers on financing, faster delivery of HIPC Initiative assistance would accelerate correspondingly the need for securing financing of the cost to the Bank, Fund and other multilateral creditors.
15. The bulk of debt relief provided under the current HIPC Initiative framework is delivered after a country reaches the completion point. The Initiative also envisages that all creditors, including multilateral institutions, could at their discretion provide some of this assistance during the interim period, that is between the decision and completion points. Such interim assistance is currently provided by bilateral creditors in the Paris Club through flow reschedulings on eligible debt service involving an NPV reduction of up to 80 percent (Lyon terms) during the interim period. Both Côte d'Ivoire and Mozambique are receiving or have received such assistance. The assistance provided beyond traditional debt relief mechanisms in cash-flow terms up to the completion point, and the NPV reduction (beyond Naples terms) already implemented before the completion points are both credited to the Paris Club at the completion point as part of its contribution under the Initiative. IDA also provides interim assistance by providing grants instead of credits to eligible countries as a portion of normal IDA lending programs.10
16. The purpose of such debt relief is to provide:
17. Additional interim assistance from multilateral creditors could have the following characteristics:
18. Multilateral institutions, with the exception of the World Bank, have not provided interim relief, mainly because of financial constraints. In the context of the MDB consultations, some institutions are willing to discuss the possibility of providing interim relief on debt service flows so that HIPCs could be in a position to improve their social programs more quickly.11 In light of the above considerations, a possible scheme for interim relief by the Fund is described in Annex II. The World Bank will elaborate any enhancements to its interim assistance in a forthcoming Board paper regarding its participation under an enhanced HIPC Initiative framework.
Floating completion points
19. A floating completion point approach would entail a country reaching its completion point under the Initiative when it had implemented a set of key, pre-defined structural reforms, provided the country remained on track with its macroeconomic performance. This approach is proposed to enable countries that meet ambitious policy targets early to shorten the interim period. Conversely, if these targets were not met, the completion point would be delayed (as under the current framework of the Initiative).
20. While a generalized shortening of the interim period may not provide sufficient time or incentive to secure implementation of key reforms, especially in those countries with weaker performance track records, a floating completion point could be linked to the implementation of crucial building blocks underpinning durable growth, debt sustainability and poverty reduction. It would complement the introduction of a decision point-based calculation proposed above which removes the link between the timing of the completion point and the amount of assistance received. However, it could be argued that the importance of floating completion points, indeed of completion points themselves, is reduced by the widespread provision of interim relief which smoothes the delivery of debt relief under the Initiative.
21. A floating completion point approach would add a desirable incentive for countries to implement reforms quickly, and develop program ownership by empowering the government to affect the length of the interim performance period. It could also help countries focus on the key reforms needed for sustainable development and would highlight the responsibility of the beneficiary country for satisfying the reforms monitored under the HIPC Initiative. It would be desirable to strike an appropriate balance between meeting discrete actions or targets which could be transparently assessed, and overall progress in other areas where judgement would be required; a minimum critical mass of the first element would be required to make this approach effective.12 However, it should be recognized that it may not be easy to identify and clearly define, with the countries involved, a small number of key elements that would adequately represent overall progress in macroeconomic, structural, and social areas, while at the same time providing for equitable treatment across countries. It is also crucial that floating completion points are introduced in a way that provides for a balanced assessment of a country's track record in the macroeconomic area, in pursuing structural reforms, and implementing poverty reduction programs.
22. Implementation of such floating completion points will require difficult choices at the country-specific level. Box 1 notes that the Bank's experience with floating tranches has been favorable. However, it could be more challenging to define, with the countries concerned, the small number of key reforms required for durable growth, debt sustainability, and poverty reduction to which a floating completion point should appropriately be tied. In the light of these considerations, the staffs propose to review the country-specific application of floating completion points after 12 months, i.e. before the fall 2000 Annual Meetings.
Front-loading of debt relief after the completion point
23. Under the current Initiative, the delivery of debt-service relief after the completion point has been front-loaded by the major IFIs involved in the case of Bolivia. This was necessary in order to deal with a hump in debt-service payments above the debt-service target of 20 percent. In the context of deeper debt relief and an enhanced focus on poverty reduction, a more widespread front-loading of the delivery of assistance could free up more resources for increased social spending provided such an increase can be effectively spent (e.g. provided that absorptive capacity constraints or implementation problems in executing the additional expenditure can be effectively be addressed).
24. For illustrative purposes, staffs have prepared scenarios detailing the potential cash-flow impact of HIPC Initiative relief provided by multilateral development banks on debt service to MDBs (Table 1).13 The scenarios assume that either a uniform 50 percent or 90 percent of the debt service due is covered by HIPC Initiative assistance until the required NPV debt reduction is delivered. In order to give a better idea of potential savings in the short and medium terms, the savings are presented on the basis of five-year intervals. The effects of heavy front-loading of debt-service relief are particularly evident in the 90 percent scenario where debt-service obligations rise sharply in the 2005 — 2009 period compared to the previous five-year period: this illustrates that, in aggregate, front loading of debt-service relief on this scale would be unlikely to be consistent with longer-term debt sustainability. In practice, this constraint is appropriately assessed on a country-specific basis.
25. As in the case of interim assistance, it is not envisaged that all multilateral institutions would necessarily be able to front-load assistance because of resource constraints. Bank and Fund staff would discuss this with other multilaterals.
Table 1. HIPC Initiative Assistance — Implications for Multilateral Debt Service 1/
C. Broader Assistance
26. The enhancements to the Initiative outlined above are projected to increase the number of countries that could qualify for assistance under the Initiative from 29 under the current framework to 36 countries. Based on the Spring 1999 costings exercise, Table 2 details the countries that may qualify for HIPC Initiative debt relief under the current and the proposed enhanced frameworks as well as the possible time schedule when they may reach their respective decision points. Eligibility would not be limited to the countries included in the group of 41 HIPCs that was established early on for analytical purposes. Rather, if a country meets the criteria of the proposed enhanced Initiative it could be eligible for assistance, i.e., a country is IDA-only and ESAF-eligible, has established a minimum three-year track record of satisfactory performance under Bank- and Fund-supported programs, and at the decision point has debt ratios after the full use of traditional debt relief mechanisms that are above the sustainability targets. Countries that have not yet adopted those programs would need to do so by end-2000, which is the deadline (sunset clause) for meeting the entry requirement. Due to the lack of sufficient data, the staffs have not been able to identify any additional countries currently meeting these criteria, though Haiti may be in this category. Eligibility for assistance under the Initiative will be assessed on a case-by-case basis as the issue arises.
III. Implementation Arrangements
27. The proposed enhanced HIPC framework would continue to be guided by the six principles14 which were endorsed by the Development and Interim Committees in 1996: (1) the objective should be to target overall debt sustainability on a case-by-case basis, thus providing an exit strategy from the rescheduling process; (2) action will be envisaged only when the debtor has shown, through a track record, ability to put to good use whatever exceptional support is provided; (3) new measures will build, as much as possible, on existing mechanisms; (4) additional action will be coordinated among all creditors involved, with broad and equitable participation; (5) actions by the multilateral creditors will preserve their financial integrity and preferred creditor status; and (6) new external finance for the countries concerned will be on appropriately concessional terms.
B. Debt Sustainability Analysis (DSA)
28. The DSA at the decision point under the enhanced framework would be simplified in a number of respects (see Box 2):
Table 2: Countries expected to qualify for HIPC Initiative Assistance
29. The DSA would continue to be a joint exercise of the HIPC government and of the staffs of the Bank and Fund and, where appropriate, other major regional development banks. In undertaking this exercise there would be no change to the other features of the calculation, namely, using actual data on (i) a three-year backward-looking average of exports; (ii) the latest year central government revenues; and (iii) the six-monthly average of the commercial interest reference rates (CIRRs) as currency-specific discount rates.15
30. The DSA at the completion point would aim at assessing the extent to which debt sustainability was being achieved. The enhanced framework seeks to provide deeper and earlier debt relief and thereby a significantly greater margin of safety against adverse economic developments. In addition, the upfront commitment by the international community to comprehensive debt relief would supersede the outcome test under the current framework, i.e., the evaluation of whether the NPV debt-to-export ratio at the completion point fell within +/- ten percentage points of the target agreed at the decision point.
31. The adoption of a decision point-based calculation of assistance implies no automatic reassessment of the amount of assistance provided at the completion point. However, the staffs recommend that the completion point document would still provide an assessment of the debt situation at the completion point. Although the risk remains that the outcome at the completion point could be significantly above the sustainability targets, this would be reduced by additional committed—and prospective—ODA debt forgiveness. There would be no presumption of additional assistance as the new targets would already provide a substantial safety cushion. If there was a fundamental change in a country's economic circumstances at the completion point (e.g. as evidenced by a long-term projection of the NPV of debt remaining at above 150 percent of exports), and the change was clearly due to an exogenous development, the international community retains the option to increase assistance at that time. This would, as under the current Initiative, require the consent of all creditors involved. It is the staffs' view that the likelihood of topping up at the completion point under such a proposal would be much reduced compared to the current framework (as has already occurred for Mozambique).
32. DSAs at both the decision and completion points in the future would provide a more detailed analysis of debt service indicators. Such analysis would include a comparison of debt service due and paid before and after the HIPC Initiative debt relief in absolute and relative terms. This would assist in assessing the potential impact of the relief on the balance of payments, the government budget and on social development programs.
33. Under the current framework, the debt service-to-export ratio is expected to fall within a range of 20-25 percent, or below, by the completion point. Under the enhanced framework, with deeper and earlier debt relief, it would be expected that this ratio would fall within a range of 15-20 percent, or below.
34. In the context of providing a stronger and clearer link between debt relief and poverty reduction, greater attention would be paid to the impact of debt relief on government budgets. While the capacity to service debt from a fiscal perspective depends on the full budgetary context, future DSAs would provide an analysis of the trend of cash debt service in relation to revenues and of the potential that debt relief could have in underpinning sustainable increases in poverty reduction programs (see Chart 1).
C. Delivery profile of assistance
35. The decision point document would comment on the appropriate degree of front-loading of the delivery of assistance both through interim relief and through the profile of delivery of assistance after the completion point. This would be determined in the light of:
36. It would be desirable to ensure a declining trend in a country's debt and debt-service indicators after assistance under the Initiative. While some blips in the actual ratios may be unavoidable due to exogenous shocks, the delivery of assistance should aim ex ante at a steady declining trend of the NPV of debt-to-exports and- revenue ratios, and of the debt service-to-exports and -revenue ratios in order to provide a reasonable assurance that debt sustainability has been achieved and that debt problems will not re-emerge at a later stage.
D. Performance Period and Criteria
37. The proposed introduction of a floating completion point would necessitate modifications to the assessment of performance to reach the completion point. The focus of the assessment would shift more towards particular achievements and outcomes rather than the length of the track record. In addition, the assessment would give more weight than under the current framework to social and poverty-related reforms. Sound macroeconomic policies would continue to form an essential element of a comprehensive poverty reduction strategy.
38. To operationalize a floating completion point approach under the enhanced HIPC Initiative, the following procedures are envisaged:
39. Additional assistance resulting from any modifications to the HIPC Initiative should be available to all eligible countries, including those that have already reached their decision and completion points under the Initiative, provided that they qualify. In implementing retroactivity, staffs propose an approach that would ensure that:
40. In addition, at the time any additional assistance is provided, the international community should reaffirm that the country's policy performance remains satisfactory. Also, to the extent that the enhanced framework entails a strengthening of social sector policies and poverty reduction efforts, enhanced assistance provided to countries that have already reached their decision or completion points should be subject to the same requirements as future qualifying countries.17 Thus, for this group of countries, the Boards would need to specify in each individual case the actions that would need to be met for the enhanced debt relief resulting from the proposed changes to the Initiative to be delivered. However, existing commitments made on the basis of the current framework (e.g., for Mali, Burkina Faso, and Côte d'Ivoire) would be delivered as specified at their decision points.
41. Staffs have considered various possible approaches, including reassessing the required enhanced debt relief: (i) on the basis the historical decision point, i.e., assuming that the revised HIPC Initiative framework had been in place at the time; or (ii) based on countries' current situation so as to ensure that the country will now be at or below the newly established debt sustainability thresholds, based on the latest available data of exports, revenues, external debt, and discount rates. While the former approach has some appeal, it has the drawback that the economic environment may have changed markedly and in some cases, deteriorated which would not be reflected in this type of retroactive treatment and debt data may have been substantially revised. It would also involve difficult issues in the handling of payments that had already been made to creditors by countries that have reached the completion point. It might be preferable to adopt option (ii) above so that the concerned HIPCs would know at the earliest possible date of the additional assistance being committed by the international community consistent with meeting the new lower targets. Based on the information currently available to the staff, all nine countries18 would qualify for assistance or additional assistance under the proposed enhanced Initiative under both options. The aggregate cost of option (i) would be US$4.9 billion, while option (ii) would cost US$4 billion.
42. Thus, staffs suggests to:
F. Participation by All Relevant Creditors
43. The proposals for an enhanced HIPC Initiative framework would build on existing mechanisms for providing debt relief from the Paris Club and other bilateral and commercial creditors as well as from multilateral creditors. In order to achieve the lower debt sustainability targets that would be fixed at the decision point, creditors and donors would need to take additional action beyond the existing mechanisms governing HIPC assistance.
IV. IMPACT OF PROPOSED ENHANCED FRAMEWORK
A. Cost Estimates
44. In this section, staffs present estimates of the costs of the HIPC Initiative under the current framework, and under the proposed enhanced framework based on the last estimates prepared in April 1999 which incorporated the latest country information available to staff at that time.21 The database, assumptions, and timing of decision points remain as described in Boxes 1—2 and Table 1 of the April 13, 1999 costings supplement. It should be noted, though, that the baseline for the timing of decision points, namely the earliest that might have been proposed in the spring of 1999 under the current framework, may be optimistic as it is subject to country performance. Policy slippages as well as armed conflict or domestic unrest in some countries could delay their decision points.
Aggregate cost estimates.
45. Total costs for the HIPC Initiative under the current framework are estimated at US$12.5 billion in 1998 NPV terms.22 The costs of the proposed enhanced framework are estimated at US$27.4 billion in 1998 NPV terms for all HIPCs excluding Liberia, Somalia, and Sudan. Including these countries, costs are estimated at US$36 billion. The underlying key indicators under an enhanced framework for all 41 HIPCs are shown in Table 3. As in earlier exercises, country-specific costings are not presented here as they might create misleading expectations on the amounts and timing of prospective HIPC Initiative assistance in cases where such estimates are very uncertain and could change substantially.
Table 3. Key Indicators under the HIPC Initiative
46. The cost estimates under the proposed enhanced framework as presented in Table 4 include the cost of retroactive treatment for the nine countries that have already reached their decision points, based on the application of the enhanced parameters at their actual past decision points. As noted above, the staffs see a number of problems with such an approach that would involve hypothetical recalculations based on a macroeconomic environment that may have changed significantly since. Cost estimates based on applying retroactivity to the latest (end 1998) data show that the aggregate cost would amount to US$26.6 billion compared to the US$27.4 billion in NPV terms shown above.
Costs by creditor group
47. Under the proposed enhanced framework, the shares of HIPC Initiative costs for bilateral and multilateral creditors are estimated to remain roughly equal. Overall costs to multilateral creditors are projected to rise from US$6.2 billion under the current framework to US$13.3 billion under the proposed enhanced framework (excluding Liberia, Somalia, and Sudan). Of this amount the World Bank's cost would be US$5.1 billion (up from US$2.4 billion) and the IMF's costs would increase from US$1.2 billion to US$2.3 billion.23
Time profile of debt relief commitments
48. The time profile of commitments of assistance under the proposed enhanced framework is shown in Table 5, based on the assumed earliest decision points indicated in Table 3. On this basis, commitments (in 1998 NPV terms) to date amount to 12 percent of total projected cost. It is assumed that, through end-2000, (i) all nine countries that have already reached their respective decision points, would be reassessed on the basis of end-1998 data; and (ii) 19 other countries could qualify for HIPC Initiative debt relief. Under this scenario, creditors would be required to make debt relief commitments, amounting to a cumulative 86 percent of total cost expected under the enhanced framework (excluding Liberia, Somalia, and Sudan). This projection is of course subject to change. Past experience has shown that delays in implementing reform programs and conflict have resulted in some countries reaching their decision points later than originally scheduled. In most cases, such delays would mean that the decision point could slip into the next year, thereby shifting part of the cost to a later date. The staff will attempt to bring all the nine countries that have reached the decision point, and as many other countries as possible for early discussion of HIPC documents to the Boards, at the earliest feasible dates. It is currently envisaged that preliminary documents for 3 countries (Tanzania, Honduras, and Nicaragua) will be circulated to the Boards before the 1999 Annual Meetings, and for about 10 countries by the 2000 Spring Meetings though this latter number is obviously dependent on country performance.
Table 4. HIPC Initiative—Estimates of Potential Costs by Creditor
Table 5. HIPC Initiative: Total Potential Costs Committed at Decision Points 1/
B. Illustrative Effects on Debt Service due after HIPC Initiative Debt Relief
49. As noted earlier, the enhanced HIPC Initiative framework proposed would further reduce debt-service ratios and provide more fiscal space for potentially increased social spending in priority areas. This is illustrated in Table 6 which for the seven countries that have reached their decision/completion points, shows the estimated impact on debt service paid of the lower export and fiscal targets/thresholds proposed and the assessment of assistance based on actual data at the decision point. For these countries as a group, the average debt service payable over the 5 years following the completion point under the current framework is estimated to be about 12 percent lower than what was actually paid on average during 1993—98 with a wide dispersion among countries.24 25 Under the proposed enhanced framework, aggregate debt service payable after the completion point would drop by 27 percent compared to payments made from 1993-98 based on the current profile of delivery of assistance.26 The decline in the average debt service-to-exports ratio for these countries is even more marked. Compared to the average ratio prevailing during 1993—98, the debt service ratio would be cut in half to 11 percent under the current framework and fall by some 60 percent to a ratio of 8-9 percent under the proposed enhanced framework. If assistance were front-loaded, as discussed above, there would be a decline of around 35 percent compared to payments made earlier (see Chart 2). In all qualifying countries, the NPV of debt is estimated to be reduced by around 40 percent on top of traditional debt relief mechanisms (such as Naples terms from the Paris Club).
Table 6. Illustrative Estimates of Cash-Flow Impact of HIPC Initiative Assistance
V. HIPC DEBT RELIEF AS PART OF A BROADER APPROACH TO POVERTY REDUCTION
50. Debt relief is not an objective in itself but rather a means to promote the wider goals of poverty reduction and sustainable development. To be effective, the proposed enhanced Initiative needs to be reinforced by:
VI. ISSUES FOR DISCUSSION
52. This paper has provided a number of specific proposals to strengthen the HIPC Initiative. They aim at delivering deeper, faster, and broader debt relief, as well as simplifying the framework where possible. The proposals follow the principles for change set out by the President of the Bank and the Managing Director of the Fund and endorsed by the Boards. As was emphasized in the Progress Report by the Managing Director and the President, agreement on enhancement of the Initiative needs to proceed in parallel with agreement on additional financing for multilateral creditors in general, and the Bank and Fund in particular. Companion papers on financing for IDA and the IMF contributions to the Initiative will be issued prior to the Board discussion. Pending discussion of these papers, Directors' preliminary views are sought on the following proposed enhancements to the Initiative (Box 4).
53. Do Directors support the proposed changes to the debt sustainability targets under the Initiative to provide a greater cushion for the achievement of debt sustainability, namely a lowering of the NPV of debt-to-export target to 150 percent, and the NPV of debt-to-fiscal revenue target to 250 percent, with a lower threshold level for the degree of openness of an economy of an export-to-GDP ratio of 30 percent, and a threshold for the revenue effort to 15 percent of GDP?
54. Do Directors support a change in the assessment base for the assistance required under the HIPC Initiative from the data projected for the completion point to the actual data at the decision point?
55. Do Directors support the provision of faster, more front-loaded relief with the objective of freeing up more resources for increased social and other poverty-reduction expenditures subject to a country's capacity to make effective use of this earlier assistance, the maintenance of medium-term debt sustainability, and the debt-service profile falling due to creditors?
56. Do Directors support the provision of interim assistance by the IMF and the World Bank and other multilateral creditors? Do IMF Directors agree with the suggested levels and modalities of interim relief from the Fund?
57. Do Directors support the introduction of floating completion points tied to key structural reforms designed to mark a significant advance toward debt sustainability and sustainable development, with the introduction of the safeguards proposed to ensure macroeconomic sustainability? 58. Do Directors agree that the country-specific application of such floating completion points should be reassessed after 12 months, i.e. before the fall 2000 Annual Meetings?
59. Do Directors agree with the proposed simplifications in implementing the Initiative consequent on the proposed changes, namely the fixing of the debt relief as of the decision point, the dropping of the target ranges at the completion point, country-specific vulnerability analyses, and the category of "borderline" cases? This will enable the preparation of a simpler preliminary HIPC Initiative document focussing on the track record and timing of decision points, key structural policies, an enhanced framework for poverty reduction, the appropriate front-loading of assistance in the light of capacity constraints and medium-term projections of key debt ratios and the steps required to strengthen debt management.
60. With the adoption of a decision point-based calculation of assistance, it is proposed that no automatic reassessment at the completion point of the amount of assistance would be provided. However, the international community could—on a discretionary basis—top up assistance if exogenous shocks have led to a major deterioration in the debt situation. Do Directors agree?
61. It is envisaged that a more detailed analysis of debt service indicators should be provided. It is proposed that, while not binding, the debt-service-to-export ratio should fall within the 15-20 percent range or below. An analysis of the trend of the debt-service-to revenue ratio and the overall budgetary context would also be included in future HIPC Initiative documents. Do Directors agree with this approach?
62. The proposed introduction of a floating completion point would shift the focus of the assessment of country performance more towards particular achievements and outcomes rather than the length of the track record. In addition, the assessment would give more weight to social and poverty-related reforms (to be elaborated in the context of an enhanced framework for poverty reduction) though it should be recognized that this can only be the start of a long process leading to effective poverty reduction. Do Directors agree with the suggested approach?
63. Do Directors agree with the proposed mechanism for retroactivity, namely for countries that have already passed their decision points to benefit from the proposed enhancements to the framework based on their current (end-1998) situation based on adequate policy performance including the social content of their program?
64. The effectiveness of the proposed enhanced Initiative depends on the broader policy framework related to poverty reduction and sustainable development such as the adoption of appropriate polices in HIPCs, the support of such policies by aid flows, better access for HIPC exports to industrial country markets, and restraint on export credit lending to HIPCs, particularly for military equipment. Do Directors have views on how progress can be best be encouraged on these broader policy issues?
Modalities of Providing Fund Interim Assistance
Interim relief would advance assistance due at the completion point. It would be in the form of grants to cover debt service falling due to the Fund. The amount of HIPCs' debt service due in the interim period would therefore define a cap on the amount of assistance to be provided.
The amounts of interim assistance could be determined on a case-by-case basis on certain criteria such as:
A maximum amount of IMF interim assistance would be envisaged, namely a fixed share of the IMF cost at the completion point (say 20 percent of the assistance committed by the Fund at the decision point during each of the 2-3 "second stage" years). In practice, total debt service falling due to the Fund could, in many cases, limit assistance below these maximum amounts. This could involve a significant degree of front loading as up to 60 percent of the Fund's total assistance could be disbursed in the first 3 years of a 13-year repayment period (3 years before and 10 years after the completion point assuming at a 3-year second stage).
It would be important to ensure that interim relief—as well as the delivery of debt service from the completion point on—was consistent with a declining trend in the NPV of debt-to-export ratio after assistance under the Initiative. An excessive front-loading of overall relief would threaten the re-emergence of debt problems indicated by subsequent increases in the debt service and NPV of debt-to-export ratios. The amount of interim relief consistent with declining trends in these ratios will need to be derived on a case-by-case basis in the light of prospective actions by other creditors. The proposed scheme for interim relief assumes the early availability of the financial resources required.
1 - HIPC Initiative - Perspectives on the Current Framework and Options for Change (EBS/99/52 and IDA/SecM99-155, April 2, 1999) and HIPC Initiative - Perspectives on the Current Framework and Options for Change: Supplement on Costings (EBD/99/52, Supplement 2 and IDA/SecM99-184, Supplement 1, April 13, 1999).
4 - The original framework and the modifications regarding the fiscal window are set out in "A Framework for Action to resolve the debt problems of the Heavily Indebted Poor Countries", D/C96-5, dated April 12, 1999, and The HIPC Debt Initiative—Guidelines for Implementation, IDA/R97-35, April 22, 1997.
7 - Under the current procedure, a reassessment of assistance at the completion point is called for if the actual outcome deviates by more than +/-10 percentage points from the agreed debt sustainability target set at the decision point.
8 - At the regular multilateral development banks'(MDB) meetings on the HIPC Initiative, MDBs expressed interest in finding ways to reduce the risk that HIPC Initiative relief decisions would need to be reopened at the completion point. (See HIPC Debt Initiative, The Chairman's Summary of the Multilateral Development Banks' Meeting, IDA/SecM99-181, April 12, 1999; and IMF FO/DIS/95/57 of April 14, 1999).
9 - Under the current framework with completion point calculation, a significant advancing of interim assistance could affect the achievement of targets at the completion point. If significant assistance is advanced to the second stage and used to relieve debt service falling due before the completion point, this amount of assistance would no longer be delivered at the completion point. Hence the NPV of debt at the completion point (which encapsulates debt service from that point on) after delivery of the remaining assistance would be higher and the debt sustainability objectives might not be met.
10 - See World Bank Participation in the Heavily Indebted Poor Countries' Debt Initiative, SecM96-926, August 26, 1996. However, the substitution of IDA grants for IDA credits provides little interim cash-flow relief due to the extended grace period and low service charges of IDA credits.
12 - The conditionality for ESAF-/IDA-supported programs, however, would not be expected to change. Under the ESAF, in particular, for consistency between the macroeconomic and structural programs, certain measures that may "float" for HIPC purposes may still have a deadline for the purposes of disbursement under the ESAF.
15 - During the HIPC Initiative review process, some government representatives suggested either the use of an average CIRR over a longer period or fixing the discount rate at e.g. 6 percent. While fixing the discount rate may have the appeal of simplicity and transparency, staffs continue to favor the use of a six-month CIRR average because (i) it represents the best proxy for the currency-specific cost of external borrowing, (ii) it is the best estimate available of future interest rates, and (iii) CIRRs are regularly published and, hence, readily available to the public.
16 - Under the current framework, an earlier "floating" completion point would require the setting of a date to determine the amount of assistance to be provided under the HIPC Initiative, which is currently based on delivering sustainability as of the date of the completion point. This issue would become moot with a shift in the assessment base to actual data at the decision point.
19 - See, HIPC Debt Initiative, The Chairman's Summary of the Multilateral Development Banks' Meeting, IDA/SecM99-181, April 12, 1999; IMF FO/DIS/99/57 of April 14, 1999, and IDA/SecM99-400, June 29, 1999; IMF FO/DIS/99/93 of July 2, 1999.
22 - Excluding Liberia, Somalia, and Sudan. Total costs including rough estimates for these countries are about US$19 billion. The caveats of footnote 4 of the April costings supplement related to the weakness of estimates for these countries continue to apply.
24 - The main reason for the modest decrease in debt service (in U.S dollar terms) is that countries that have benefited from assistance under the Initiative have received immediate comprehensive cash-flow reschedulings as part of program financing in advance of the completion point. Flow reschedulings (which normally include interest falling due) are likely to have a slightly greater cash-flow impact than Paris Club stock-of-debt agreements provided at the completion point. In addition, many countries have in the past accrued substantial arrears to non-Paris Club bilateral creditors and Russia; this has tended to lower debt-service payments before the completion point. As the full implementation of the HIPC Initiative for a country requires the full participation of all creditors, this in turn requires the regularization of external arrears. In some cases, especially where the stock of arrears is large, this may result in higher debt service payments than before the regularization of arrears. This said, the debt service-to-export ratio is projected to average less than 10 percent by 2005 for these seven countries in aggregate.
25 - The simple unweighted average of the percentage changes in debt service of these seven countries was a 6 percent decline. This is higher than the 2 percent decline shown in Table 13 of the April costings supplement due to the additional assistance committed to Mozambique at the completion point.
26 - This makes no allowance for the proposed ODA debt cancellation or the provision of new ODA in grant form.