Enhancing the Framework of the Initiative: Faster, Deeper, and Broader Debt Relief

Phase I of the HIPC Initiative review requested views on a range of issues relating to the design of the Initiative including the definition of debt sustainability, eligibility criteria, the fiscal criteria and thresholds, time-frames, and links to macroeconomic and structural policy reforms. In April 1999, the Interim and Development Committees endorsed a mandate to strengthen the Initiative in order to provide deeper debt relief, while reinforcing the incentives to adopt and implement economic and social reforms, and providing a clear exit from unsustainable debt burdens. The HIPC Initiative was also on the agenda of the G-7 summit in Cologne, where heads of governments supported proposals to provide faster, deeper, and broader debt relief for the poorest countries that demonstrate a commitment to reform and poverty alleviation. Proposals to modify the HIPC Initiative were endorsed by the IMF and World Bank Boards in August 1999 subject to agreement on the needed funding, and will be considered by the Development and Interim Committees at the IMF-World Bank Annual Meetings in September 1999. These proposals would strengthen the Initiative in the following ways.

Deeper debt relief through:

• A lowering of the net present value (NPV) of debt-to-export target from 200-250 percent to 150 percent; a lowering of the NPV debt-to-fiscal revenue target from 280 to 250 percent and a lowering of the qualifying thresholds for this target from 40 to 30 percent (export-to-GDP ratio) and from 20 to 15 percent (revenue-to-GDP ratio); and, calculation of debt relief on actual data at the decision point rather than projections at the completion point.

Faster debt relief through:

• The provision of interim relief between the decision and completion points; the introduction of "floating completion points" where assistance is no longer time bound but strong performers can reach the completion point earlier; and a front loading of the delivery of debt relief subject to medium-term debt sustainability and the debt service profile.

These changes would imply:

• a greater safety margin for the achievement of debt sustainability
• expansion of eligibility from 29 to 36 HIPCs and possibly other countries
• the freeing up of more resources for an enhanced focus on poverty reduction

Debt Relief and Poverty Reduction

The second phase of the HIPC review solicited views on how to strengthen the link between debt relief and poverty reduction in the HIPC Initiative. Based on these consultations, proposals were endorsed by Bank and Fund Boards in early September and will also be considered at the IMF-World Bank Annual Meetings in late September.

The Bank and Fund Boards concluded that:

• The best way of ensuring a robust link between debt relief and poverty reduction would be to ensure that HIPC Initiative debt relief is an integral part of broader efforts to implement outcome-oriented poverty reduction strategies using all available resources.

• Broad-based participation is essential to the successful and sustained implementation of a poverty reduction strategy. Transparency and accountability were important features of any poverty reduction strategy and would help ensure effective use of debt relief.

• The use of a clear set of outcome-orientated goals for social indicators and quantified intermediate indicators are essential to ensure that poverty reduction strategies are well designed and implemented effectively.

• A new comprehensive vehicle--a Poverty Reduction Strategy Paper (PRSP)--would be introduced to strengthen countries' output-orientated poverty reduction efforts and the effectiveness of the assistance of the IMF and Bank. The PRSP would set out the government's poverty reduction plan, and would be produced by the national authorities with the assistance of the World Bank and IMF. It would be developed in a way that ensures transparency and broad-based participation of civil society and donors in the choice of goals, and the formulation and implementation of policies. The PRSP would be considered by the World Bank and IMF Boards and would guide all lending operations by both institutions as well as donor support.

• In principle, a PRSP should be in place when a country reached its decision point under the HIPC Initiative. However, in the transition period, the decision point could take place while a PRSP is being formulated, provided progress in implementation of the PRSP is made before the completion point.

Adapting ESAF

In parallel, the IMF is also reforming its main vehicle for support to all low-income countries--the Enhanced Structural Adjustment Facility (ESAF)--to make sustainable poverty reduction a central objective. The cornerstone of the new approach, which is to be discussed at the Interim Committee meeting in late September, is to base future lending to low-income countries on the comprehensive nationally owned and outcome-oriented poverty reduction strategy elaborated in the country's PRSP. As they become available, PRSPs will provide a new framework for closer collaboration between the World Bank and IMF. Clearer articulation and costing of social and anti-poverty measures will allow fuller integration of these objectives and policies in the design of the economic program. Furthermore, future ESAFs will include even greater emphasis on transparency and good governance.

Costs of the HIPC Initiative

The total costs for all creditors of implementing the HIPC Initiative before the proposed modifications was estimated at US$12.5 billion in 1998 NPV terms. Providing deeper and broader debt relief more rapidly under the strengthened Initiative would more than double this cost to over US$27 billion. Within this total, the shares for multilateral and bilateral creditors are estimated to remain roughly equal. The IMF's contribution would be about $2_ billion, to be financed by additional bilateral contributions and off-market gold sales.

Debt Relief in Perspective

The proposals described here represent a significant strengthening of the HIPC Initiative. Nevertheless, the Initiative is not, and cannot be, a panacea for all the problems of heavily indebted poor countries. Even if all the external debts of these countries were forgiven, most will still depend on significant levels of concessional external assistance for many years. Similarly, the effectiveness of the enhanced HIPC Initiative depends on the broader policy framework related to poverty reduction and sustainable development such as the adoption of appropriate policies in HIPCs, the support of such policies by aid flows, better access for HIPCs to industrial country markets, and restraints on non-concessional lending for non-productive purposes.