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Press Release No. 00/71
December 15, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

Guinea-Bissau To Receive About US$790 Million in Debt Service Relief:
The IMF and World Bank Support Debt Relief for Guinea-Bissau
Under The Enhanced HIPC Initiative

The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt-reduction package for Guinea-Bissau under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

The enhanced HIPC Initiative will help Guinea-Bissau to advance its poverty reduction programs and stimulate economic growth in the context of the strategy recently approved by the Government. Total debt relief over time for Guinea-Bissau is worth about US$790 million debt service relief. This is equivalent to US$417 million in net present value (NPV) terms1, or about 85 percent of Guinea-Bissau's NPV of debt after traditional debt relief at end-1999. Relief under the enhanced HIPC Initiative will create room for additional public expenditures on poverty reduction. Guinea-Bissau'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 that should help to achieve poverty reduction.

Within this general framework, the assistance committed by the IMF and the IDA, in nominal terms, will reach US$181 million (spread over 25 years) and US$15 million (spread over 10 years), respectively. In recognition of Guinea Bissau's limited debt servicing capacity and the post conflict challenges, both the IMF and IDA will front-load assistance to cover 100 percent of payment due on eligible debt during the initial years, with IMF payments covered over 2001-2002, and IDA payments covered until the completion point.

Guinea-Bissau will receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfies a number of conditions, including the adoption and implementation of a participatory poverty reduction strategy paper (see Annex).

Annex

1. Guinea-Bissau

Track record and poverty

As a result of the implementation of the authorities' post-conflict economic and financial program, economic indicators improved after the end of the conflict. After contracting by 28 percent in 1998, real GDP recovered in 1999 by almost 8 percent; at the same time, the consumer price index declined by about 2 percent. The current primary fiscal deficit of over 6 percent of GDP recorded in 1998 turned into a surplus of over 3 percent of GDP in 1999. Guinea-Bissau has also made a strong economic reform effort in recent years, including in the areas of governance. Guinea-Bissau remains one of the poorest countries in the world, with about 88 percent of the population living on less than US$1 a day, and its government is committed to use all available resources to ensure a substantial reduction of poverty, improve social indicators, most notably in the areas of health and education, and promote the reintegration in civilian life of demobilized ex-combatants. Moreover, the government is also committed to improving governance, in particular with regards to development of transparent budget systems.

Measures to be taken before the completion point

The full assistance from the IMF and IDA will be delivered to Guinea-Bissau when the following conditions have been met:

  • Continued commitment of Guinea-Bissau to the financial and economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF) and IDA's structural adjustment loans.

  • A full poverty reduction strategy paper has been prepared through a participatory process and satisfactorily implemented for one year, as evidenced by the joint staff assessment of the country's annual progress report. For this purpose, the government will establish soon a detailed work program, involving an active dialogue with civil society. The government's objectives will be published shortly.

  • Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including satisfactory progress in further strengthening governance, in implementing the basic education plan and the national health development program, and in reinserting into civilian life demobilized ex-combatants.

  • 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 at reducing 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 operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three-dozen countries are expected to qualify for assistance under the enhanced HIPC Initiative, of which 29 are sub-Saharan African countries. Fifteen countries have now reached their decision points under the enhanced framework (Benin, Bolivia, Burkina Faso, Cameroon, Gambia, Guyana, Guinea-Bissau, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, Uganda, and Zambia), with total committed assistance estimated at more than US$23.9 billion, representing an average stock-of-debt reduction of nearly 45 percent on top of traditional debt relief mechanisms. Debt relief packages are expected to be in place for some 20 countries by the end of the year.



1Net Present Value (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 this 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.

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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