Press Release: The Gambia To Receive US$91 Million in Debt Service Relief: The IMF and World Bank Support Debt Relief For The Gambia Under The Enhanced HIPC Initiative
December 14, 2000
Under The Enhanced HIPC Initiative
Washington, December 14, 2000 - The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for The Gambia under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total relief from all of The Gambia's creditors is worth nearly US$67 million in Net Present Value (NPV) terms 1, which is equivalent to 27 percent of total debt outstanding after the full use of traditional debt relief mechanisms.
The enhanced HIPC Initiative will help The Gambia to advance its poverty reduction programs and stimulate economic growth. The debt reduction operation will translate into debt-service relief over time of US$91 million. Debt service will be reduced by about 43 percent over 2001-05 and 25 percent over 2006-15. This will create room for additional public expenditures on poverty reduction. The Gambia's eligibility for debt relief under the enhanced HIPC Initiative is a recognition by the international community of the progress made in implementing economic reforms and achieving poverty reduction.
The overall impact of the assistance under the enhanced HIPC Initiative on The Gambia's budget is substantial. External debt service as a percentage of exports of goods and travel income will be reduced from more than 11 percent in recent years to 9 percent in 2001 and around 6 percent by 2010. The ratio of the total NPV of debt to exports is reduced from about 206 percent today to under 130 percent in 2010 and about 120 percent over 2010 to 2020.
The assistance committed by the IMF of US$2.3 million in NPV terms will be delivered over a 9-year period. The debt relief provided by IDA of US$22.5 million will be spread over a period of 12 years, covering 50 percent of The Gambia's debt-service obligations to IDA. IDA and the IMF will begin providing assistance at the decision point.
The Gambia will receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfies a number of conditions, including adoption and implementation of a participatory poverty reduction strategy paper (see Annex).
1. The Gambia
Track record and poverty
The Gambia has made substantial progress in implementing economic reforms. During the past 3 years, inflation remained low at about 2.0 percent, and the overall fiscal deficit (excluding grants) was reduced to 4¼ percent of GDP from 7.8 percent in 1997. The Gambia has also made a strong effort in implementing structural reforms in recent years, including in the area of external trade liberalization. However, The Gambia still remains one of the poorest countries in the world, with many social indicators similar to the average for Sub-Saharan Africa.
Reform steps to be taken before the completion point
The Gambia will reach its completion point under the Initiative and receive the remainder of its debt relief from all creditors once it has achieved a number of actions designed to strengthen economic growth and reduce poverty. The government of The Gambia expects to complete the full Poverty Reduction Strategy Paper (PRSP) by end-2001.
- Continued commitment of The Gambia to the financial and economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF) and IDA's structural adjustment loans.
- Completion and satisfactory implementation for one year of a fully participatory PRSP . For this purpose, the government initiated a broad-based participatory process, including civic society to review the strategy for poverty alleviation, adopted in 1994, and in the process prepare a Poverty Reduction Strategy Paper (PRSP), expected to be finalized at end-2001. The government's objectives were published in the interim PRSP in November 2000.
- Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including the triggers described in Box 7 of the HIPC Decision Point document.
- Confirmation of the participation of other creditors in the debt relief operation.
The HIPC Initiative was launched by the World Bank and the IMF 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 at reducing the 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 operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.
Some three-dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Fourteen countries have now reached their decision point under the enhanced framework (The Gambia joins Benin, Bolivia, Burkina Faso, Cameroon, Guyana, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, Uganda and Zambia), with total committed assistance estimated at more than US$23 billion, representing an average NPV stock-of-debt reduction of nearly 45 percent on top of traditional debt relief mechanisms. Work is underway to have debt relief packages in place for more than 20 countries by the end of the year.
1The NPV of debt is the discounted sum of all future debt-service obligations (interest and principal) on existing debt. The NPV of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted, under the HIPC Initiative, at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.