Press Release No. 01/45

Press Release: IMF and World Bank Support US$1.9 Billion in Debt Service Relief for Ethiopia Under Enhanced HIPC Initiative

November 12, 2001

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) have agreed that Ethiopia has taken the steps necessary to reach its decision point under the Heavily Indebted Poor Countries (HIPC) Initiative, becoming the 24th country to qualify for debt relief under the Initiative's enhanced framework.

HIPC debt relief from all of Ethiopia's creditors will amount to approximately US$1.3 billion in net present value (NPV) terms or 47 percent of Ethiopia's total official external debt after traditional debt relief (corresponding to US$1.9 billion in debt service relief over time). As a result, the NPV of debt to exports ratio will be cut from 350 percent to 150 percent (at decision point), and even further over the next decade. Based on current projections, the NPV of debt to export ratio is expected to rise somewhat above the 150 percent threshold during the 3-4 years following the completion point due to high but essential levels of new borrowing to help finance post-conflict reconstruction and rehabilitation. This "hump" would be removed and the NPV of debt to export ratio would remain below 150 percent at completion point and beyond, when account is taken of expected additional bilateral relief.

The savings in debt service resulting from the HIPC assistance are substantial, amounting to about US$96 million per year on average until 2021. Debt service as a percentage of exports will thus be cut by more than half, declining from 16 percent to 7 percent by 2003, and declining steadily thereafter to below 4 percent by 2021. Debt service as a percentage of fiscal revenue and GDP are also cut significantly, to an annual average of 7.8 percent and 1.6 percent respectively over the next ten years, and declining further thereafter. The resources made available by debt relief provided under the HIPC Initiative will be allocated to key anti-poverty programs, which are outlined in Ethiopia's Interim Poverty Reduction Strategy Paper (I-PRSP). Poverty-targeted expenditures are projected to increase steadily, from 10.9 percent of GDP in 2000/01 to 14.7 percent in 2001/02 and 15.5 percent 2002/03.

Based on proportional burden sharing, multilateral creditors will provide US$763 million in debt relief in NPV terms. Of this IDA's share equals US$463 million or 36 percent of the total assistance. The IMF will provide US$34 million. Bilateral creditors will provide US$482 million, and commercial lenders US$30 million.

ANNEX

1. Ethiopia

Poverty and Track Record:

The level of poverty in Ethiopia is among the highest in the world. Per capita income of US$100 ranks the second lowest in the world and one-fifth of the average for sub-Saharan Africa. Ethiopia ranks 171 out of 174 on the UNDP 2000 human development index. Life expectancy is 43 years, and prospects are that this number will fall with a developing HIV-AIDS pandemic. Only one-third of men and less than one-fifth of women can read and write. This extreme poverty is exacerbated by high vulnerability of agricultural production to changes in weather conditions leading to high variance in the levels of essential food consumption. Rural poverty is consistently higher than in the cities, with 80 percent of the poor living in rural areas.

For much of the 1990s, Ethiopia pursued an overall program of economic reform and liberalization, which with sustained donor support enabled the government to focus spending on much-needed infrastructure and social programs. However, by the turn of the decade, Ethiopia's prudent financial stance began to erode under pressure from the border conflict with Eritrea, with drought conditions in 2000 exacerbating a broad deterioration in the economic situation. With the December 2000 peace agreement and Ethiopia's emergence from conflict, the government has resumed its reform efforts and reconfirmed its commitment to poverty reduction within a framework of macroeconomic stability, as indicated in its interim PRSP.

Performance under an IMF-supported Poverty Reduction and Growth Facility (PRGF) program has been good. Real GDP growth in 2000/01 is estimated to have been about 7.9 percent, inflation turned negative, and the external current account deficit fell to 4.9 percent of GDP, down from 5.2 percent the year before.

Steps to be taken before the Completion Point

The full amount of debt relief from the IMF, IDA and other creditors will be delivered to Ethiopia following the completion of a number of measures in key areas recommended by the Boards of the World Bank and IMF following their review of a preliminary analysis of Ethiopia's debt situation in February 2001. In defining the specific completion point triggers, the Ethiopian authorities, in consultation with IMF and IDA staffs, have focused on ensuring that measures will be (i) streamlined and complemented by reforms pursued in PRSP and other Bank and IDA supported programs, (ii) leading to tangible and measurable outcomes, (iii) ambitious but feasible within a relatively short timeframe, and (iv) monitorable

Specific steps include:

Full PRSP—Complete, and implement satisfactorily for one year, 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 future concessional assistance.

Macroeconomic Stability—Maintain macroeconomic stability as evidenced by satisfactory implementation of the PRGF-supported program

Governance and Public Expenditure Management—Strengthen public expenditure management, with an emphasis on reconciling monetary and fiscal accounts starting in fiscal year 2001-02, and consolidate on a comprehensive basis federal and regional budgets for each fiscal year starting in 2002/03.

Structural Reforms

• Introduce Value Added tax by January 2003
  
  
• Complete financial restructuring of the Commercial Bank of Ethiopia and increase competitiveness of the financial sector through a number of specific actions.
  
  
• Improve competitiveness and efficiency of fertilizer input market.
  
  

• Increase gross enrollment rate for girls in primary level from 40 percent to 50 percent and reduce repetition rate at primary levels.
  
  
• Increase DPT3 vaccination coverage to 50 percent and achieve higher utilization rate of health outreach facilities.
  
  
• Combat HIV-AIDS through complementing government's overall strategy with increased distribution of condoms (by 6 million) throughout the country.
  
  

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 HIPC Initiative aims at reducing the 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 24 countries under the enhanced HIPC Initiative framework: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia, for which total committed assistance is estimated at some US$36 billion, representing, with other sources of debt relief, an average reduction in their debt stocks of nearly two-thirds in NPV terms.