Press Release No. 00/41

Assistance Under the Enhanced HIPC Initiative Will Cut
More Than US$900 Million in Debt Service Over Next Two Decades

The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed this week to support a comprehensive debt reduction package for Honduras under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The debt relief package will save Honduras more than US$900 million in debt service over the coming years, and is equal to US$556 million in net present value (NPV) terms.

At the end of 1999, Honduras' total external public debt, after full application of traditional debt relief mechanisms, was about US$3.1 billion in NPV terms. This equaled about 135 percent of exports and more than 300 percent of the country's central government revenue. HIPC assistance, provided after application of traditional debt relief mechanisms (i.e., a stock-of-debt reduction under Naples terms from bilateral creditors), is calculated to achieve the debt to government revenue target of 250 percent. Under the HIPC relief package, bilateral creditors will provide US$215 million NPV in debt reduction to Honduras, with multilateral creditors providing US$340 million NPV. Of this total amount, the World Bank will deliver US$98 million NPV, a 43 percent reduction in debt service over the next 10 years. The assistance committed by the IMF of US$30 million NPV will be delivered over eight years, and will cover, on average, 22 percent of debt-service obligations to the Fund. Debt relief for Honduras under the enhanced HIPC Initiative is expected to be significantly front-loaded, with most relief delivered during the first 15-20 years.

The World Bank will start providing debt relief immediately, and the IMF will do so once creditors representing more than 80 percent of Honduran external debt have assured their participation in the enhanced HIPC Initiative. The Central American Bank for Economic Integration (CABEI) has been providing relief since May. The Inter-American Development Bank (IDB) Governors' Working Group on HIPC Debt Relief has also agreed to provide debt relief to Honduras. Delivery of debt relief will proceed upon completion of the necessary actions by the IDB's Board of Governors and Board of Directors. With respect to bilateral debt, Honduras continues to benefit from a moratorium on debt service payments to the Paris Club of creditors.

Honduras's eligibility for debt relief under the enhanced HIPC Initiative is a recognition by the international community of the country's progress in implementing reforms in macroeconomic, structural and social policies. The 25-percent debt service reduction enabled by the enhanced framework will help sustain this progress through the next decade. (See Annex)

ANNEX

1. Honduras

Track record and poverty

Honduras has made substantial progress in implementing economic reforms over the past decade. Inflation was reduced to 11 percent in 1999 from 23 percent in 1990, and the overall fiscal deficit (excluding grants) was reduced to 2.3 percent in 1999 from 7.7 percent of GDP in 1990. Honduras has also made a strong structural reform effort in recent years, including public sector modernization and financial liberalization. While Honduras remains one of the poorest countries in the Latin America region, the proportion of its population living in poverty, according to some estimates, declined to 66 percent in 1999, from 75 percent in 1991. Notable improvements in social indicators have also been recorded, especially in the areas of education and health.

Reform Steps to be taken before the Completion Point

The full debt reduction provided by the IMF, IDA and all other creditors will be delivered to Honduras when the following conditions have been met, as part of an overall satisfactory effort on to reduce poverty:

· Continued commitment of Honduras to the financial and economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF).
· Completion of a poverty reduction strategy paper through a participatory process, and a first annual implementation report of the paper, which will need broad endorsement by the Executive Boards of the IMF and the World Bank.
· Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including the preparation of a participatory anti-corruption strategy, social security reform, strengthening of the financial sector, and improvements in the quality of education, the delivery of health services to the poor, and the efficiency of safety nets.
· Confirmation of the participation of other creditors in the debt relief operation.

2. General

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced Initiative aims to reduce the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt reduction operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Thirty-six countries are expected to qualify for assistance under the enhanced HIPC Initiative, of which 29 are sub-Saharan African countries. By the end of July, 16 countries will have been reviewed under the enhanced framework, for packages amounting to some $25 billion in debt service relief over time. Eight countries have already reached their decision point under the enhanced framework (Honduras joins Bolivia, Burkina Faso, Mauritania, Mozambique, Senegal, Tanzania, and Uganda), with total committed assistance estimated at roughly US$15 billion, representing an average NPV stock-of-debt reduction of about 45 percent on top of traditional debt relief mechanisms. In addition, in the coming days Benin is expected to qualify for assistance under the enhanced HIPC framework.

For more information on HIPC, visit:

http://www.imf.org/external/np/exr/facts/hipc.htm
http://www.worldbank.org/hipc/

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