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HIPC Initiative—A Progress Report
Prepared by the Staffs of the International Monetary Fund and the World Bank

September 25, 1998

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Introduction

1. In April 1998, the Development and Interim Committees welcomed the progress made in implementing the Heavily Indebted Poor Countries (HIPC) Initiative. Six countries had already reached decision points under the Initiative—Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, Mozambique, and Uganda—and Uganda had also reached its completion point, triggering the release of committed debt relief. The Committees encouraged other potentially-eligible countries to take expeditiously the necessary adjustment measures to qualify for HIPC assistance. They also stressed the importance of an early resolution to the financing of multilateral contributions to the HIPC Initiative. This report describes the progress made in implementing the Initiative since April 1998, including the review of the HIPC Initiative, financing status, country implementation for Bolivia and Mali, and the steps ahead.

Fund and Bank review HIPC Initiative

2. When the Interim and Development Committees endorsed the HIPC Initiative in September 1996, they agreed that it would be open to HIPCs that pursue or adopt programs of adjustment in the following two years, after which the Initiative would be reviewed and a decision made whether it should be continued. The IMF and World Bank Boards completed the required review in September 1998, taking stock of what remained to be done at the end of the first two years and updating the estimated costs of the Initiative. In the discussions by the Boards of the review paper, inter alia:

  • The Boards welcomed the progress made so far in implementing the HIPC Initiative.

  • The original two-year entry period for countries to begin their adjustment program was extended from September 1998 to end-2000. Several Directors noted that the HIPC Initiative should not be seen as a permanent facility, and encouraged potential eligible countries, including those emerging from conflict, to begin Fund- and Bank-supported programs as soon as possible.

  • The Boards discussed the link between debt relief and social development, and considered this link should be viewed in the perspective of overall poverty alleviation efforts. Directors considered that a one-to-one correspondence between debt-service relief and social expenditures cannot always be easily established. They welcomed the staff’s intention to establish a link between HIPC social targets and social development targets for the twenty-first century set out by the OECD’s Development Assistance Committee.

  • The IMF Board agreed to broaden the programs which could qualify as part of the first three year stage leading up to the decision point, by counting programs supported by post-conflict emergency assistance on a case-by-case basis. In addition, the majority of Executive Directors endorsed the view that the Fund already has sufficient instruments in place to provide assistance to HIPCs in the interim period between the decision and completion points, and thus were not in favor of more formal HIPC interim assistance by the Fund.

  • The Boards agreed that a comprehensive review of the Initiative will be undertaken as early as 1999.

3. Updated costings prepared by the Fund and Bank staff show that estimated baseline costs of the HIPC Initiative have risen from US$7.4 billion in 1996 NPV terms based on the estimates prepared in July 1997, to US$8.2 billion. Total costs are now estimated at about US$9.7 billion in 1998 dollars and using an updated 6 percent discount rate. The entire increase in costs is due to higher estimated costs for post-conflict countries, for which the data remain poor and cost estimates are subject to wide confidence intervals. Estimated costs for other countries which have already begun adjustment and reform programs are broadly unchanged. The above costings exclude Liberia, Somalia, and Sudan—for which data remain very poor—although these countries could potentially have large costs if they became eligible for assistance under the Initiative.

Financing Fund and Bank participation in the HIPC Initiative

4. The IMF and World Bank remain committed to meeting their full shares of the cost of the HIPC Initiative. The Fund has sufficient available resources from the ESAF-HIPC Trust and the authorized temporary transfer from the ESAF Trust Reserve Account to cover expected commitments under the HIPC Initiative through at least mid-1999 and likely through the end of the year, depending exactly when countries reach their decision points. Fund Directors expressed concern about the financing of the Fund’s share of HIPC Initiative costs, and stressed the need for urgent decisions on long-term financing needs of the ESAF-HIPC Trust. A paper on this has been circulated to the Board for discussion soon after the 1998 Annual Meetings.

5. The World Bank has transferred US$750 million from IBRD net income and surplus to the HIPC Trust Fund so far. In July 1998, the Executive Directors recommended to the IBRD Board of Governors another transfer of US$100 million from fiscal year 98 net income, which will be considered in early October, during the Annual Meetings. On a commitment basis, the Trust Fund has earmarked US$500 million for the six countries that have reached their decision point to date, leaving an uncommitted balance of about US$300 million (including accrued investment income). The remainder of the relief committed by the Bank to this group of countries (US$205 million in NPV terms) is being provided by replacing IDA credits with grants, which will amount to about US$660 million in nominal terms over the period of fiscal years 1998-2001.

Country implementation

6. In September, the Boards agreed that Bolivia had reached its completion point, and Mali its decision point, reflecting these two countries’ good progress in implementing adjustment and reform programs. Nine countries have so far reached the decision point, and total commitments to the seven which required assistance under the HIPC Initiative amounts to about US$6.1 billion in nominal debt service relief or US$3.1 billion in NPV terms (see Table).

Bolivia completion point

7. In light of continued strong policy performance, and commitments by other creditors to provide assistance under the HIPC Initiative, Bolivia reached its completion point in September 1998, one year after the decision point. Total assistance provided by all creditors to Bolivia under the HIPC Initiative amounts to approximately US$760 million in nominal debt service relief. This is equivalent to a reduction in the 1998 present value of external debt by US$450 million, or by over 13 percent of outstanding debt. HIPC assistance will help enable Bolivia to meet high priority development needs, especially in education, health, and infrastructure. In view of Bolivia’s relatively high debt-service ratio over the next several years, delivery of this assistance will be front-loaded, with 40 percent provided by 2002. The IMF has deposited its share of assistance, US$29 million in NPV terms, in an escrow account to be used to service debt to the IMF over the next five years. The World Bank will deliver its assistance entirely through the HIPC Trust Fund by earmarking an amount equivalent to US$54 million in NPV terms and covering IDA debt service due, on behalf of Bolivia, from the last quarter of 1998 until these resources are exhausted, most probably in early 2002. The Inter-American Development Bank’s assistance to Bolivia of US$155 million in net present value terms will be provided through a combination of: (i) a write-off of selected concessional loans from its Fund for Special Operations (FSO); and (ii) the partial payment of interest on selected loans from its ordinary capital (OC) using its Intermediate Financing Facility. IDB’s assistance would be significantly front-loaded, with over 60 percent of the relief (in net present value terms) to be delivered by 2003. Paris Club creditors have agreed to top up Bolivia’s Naples terms stock-of-debt operation to Lyon terms (80 percent NPV reduction).

Mali decision point

8. In September 1998, the Executive Boards of the IMF and IDA agreed that Mali had reached its decision point under the HIPC Initiative and approved assistance of approximately US$250 million in nominal debt service relief. This is equivalent to a reduction in the end–1998 present value of external debt by US$128 million, or 10 percent of the debt stock. Assistance for Mali under the HIPC Initiative will free up resources to help finance needed social programs and accelerate structural reforms. Given Mali’s track record in implementing adjustment and reform programs over the last decade, and the stock-of-debt operation granted by the Paris Club in May 1996, the interim period was shortened to slightly over one year with a completion point in December 1999. Delivery of HIPC assistance is conditional on assurances of consistent action by other creditors, and continued strong policy implementation under Bank- and Fund-supported programs, including completion of the mid-term review under the first annual arrangement of a successor ESAF arrangement. Bank and Fund Executive Directors noted that a small amount of additional financing needed to be identified to provide enough assistance for Mali to reach the agreed net present value of debt to exports target of 200 percent. Directors encouraged bilateral creditors—particularly non-Paris Club creditors—to provide additional debt relief on their official development assistance claims in line with the earlier cancellation of ODA claims on Mali by most Paris Club creditors.

Next steps

9. Countries will continue to reach decision and completion points under the HIPC Initiative as they meet the necessary performance requirements. Over the coming year, countries which possibly could reach their decision points include Chad, Ethiopia, Guinea, Mauritania, Niger, Togo, Sierra Leone, and Vietnam, although not all of these would be expected to require assistance under the Initiative. In addition, while preliminary discussions in April 1998 indicated that Guinea-Bissau would be eligible for assistance at a decision point in the third quarter of 1998, this has been delayed by the conflict in that country. Guyana is expected to meet the requirements to reach its completion point in early 1999.

10. Fund and Bank staff will prepare another progress report on the implementation of the HIPC Initiative for the next meetings of the Interim and Development Committees in April 1999.