Press Release: Guinea to Receive US$800 million in Debt Service Relief -- The IMF and the World Bank Support Debt Relief for Guinea under the Enhanced HIPC Initiative
December 22, 2000
The IMF and the World Bank Support Debt Relief for Guinea
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 under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total debt service relief from all of Guinea's creditors is worth about US$800 million, corresponding to about US$545 million in Net Present Value (NPV1) terms, which is equivalent to about 32 percent of total debt outstanding after the full use of traditional debt relief mechanisms.
The enhanced HIPC Initiative will help Guinea to advance its poverty reduction programs and stimulate economic growth. The debt reduction operation will translate into debt-service relief equivalent to about one-third of Guinea's debt-service obligations between 2000 and 2019. This will create room for additional public expenditures on poverty reduction. Guinea's eligibility for debt relief under the enhanced HIPC Initiative is recognition by the international community of the progress made in implementing economic reforms.
The assistance committed by the IMF of US$ 31.4 million will be delivered over a seven-year period, and will cover on average 26 percent of debt-service obligations to the Fund. The debt relief provided by IDA of US$ 152 million in NPV terms will be spread over a period of 20 years, covering 50 percent of Guinea's debt-service obligations to IDA. The IMF and IDA will start providing debt relief in January 2001.
Guinea 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 full, participatory poverty reduction strategy paper (see Annex).
Track record and poverty
Guinea has made significant progress in implementing economic reforms notwithstanding adverse external developments in the past eighteen months, including an increase in the frequency and the violence of rebels attacks from Sierra Leone and Liberia at the borders, a deterioration in its terms of trade, and reduced financial support from the donor community. Output growth is projected at 4.5 percent in 2000, up from 3.3 percent in 1999, while average inflation is projected to rise from 4.6 percent in 1999 to 7.7 percent in 2000. The external current account deficit is projected to narrow from 6.8 percent of GDP in 1999 to 5.9 percent of GDP in 2000. The primary budget surplus is projected to rise to 2.9 percent of GDP in 2000 from 2.3 percent of GDP in 1999 and the overall fiscal deficit (excluding grants) to remain stable at 5.3 percent of GDP.
Guinea has also made a strong structural adjustment effort in recent years, including in the areas of decentralizing public service delivery; the privatization of public enterprises; the improvement of public expenditure management; and improved governance and transparency. While Guinea is one of the poorest countries in the world and its social indicators are still relatively weak, it has made greater progress in social development than the average sub-Saharan African country, particularly in the area of education.
Steps to be taken before the Completion Point
The full assistance from the IMF and IDA will be delivered to Guinea when the following conditions have been met:
- Continued maintenance of macroeconomic stability and a sustained commitment of Guinea 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 the satisfactory implementation for one year, of a fully participatory Poverty Reduction Strategy Paper (PRSP), for which the Executive Boards of the IMF and the World Bank will have concurred with the staff's assessment that it provides a sound basis for reaching the completion point under the enhanced HIPC Initiative, and for concessional assistance from the IMF and the World Bank. For this purpose, the government is presently organizing a series of consultations and dialogues with civil society, which is expected to take place between January and June 2001. The government's objectives have been published in the recently issued Interim-PRSP.
- Will have concurred with the staff's assessment that it provides a sound basis for reaching the completion point under the enhanced HIPC Initiative and for IMF and World Bank concessional assistance.
- Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, including (i) successful implementation of the specific poverty reduction policies, notably in the health and education sectors; and (ii) successful implementation of measures to fight corruption and strengthen governance.
- Confirmation of the participation of other creditors in the debt relief operation.
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 HIPC Initiative aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports or 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. Debt relief packages are now in place for 22 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia), with total committed assistance estimated at some US$34 billion, representing an average NPV stock-of-debt reduction of nearly 48 percent on top of traditional debt relief mechanisms.
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.