Press Release: IMF and World Bank Support US$950 million In Debt Service Relief For Sierra Leone Under Enhanced HIPC Initiative
March 19, 2002
The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for Sierra Leone under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total relief from all of Sierra Leone's creditors is worth nearly US$950 million, which is equivalent to US$600 million in Net Present Value (NPV) terms,1 or 80 percent of total debt outstanding after the full use of traditional debt relief mechanisms.
Under the decisions taken by the two organizations, assistance committed by IDA—US$122 million in NPV terms—will be delivered over a 20-year period and will cover on average 89 percent of debt-service obligations falling due to IDA. Debt relief provided by the IMF-US$123 million in NPV terms-will be delivered over the next ten years. Both the IMF and IDA will begin providing debt relief immediately. The bulk of assistance from other creditors under the enhanced HIPC Initiative will be delivered when Sierra Leone completes a number of agreed measures, paving the way for reaching a completion point in a few years' time.
The government of Sierra Leone has developed a detailed plan for the use of funds made available through debt relief under the enhanced HIPC Initiative, and for their transparent and accountable expenditure. The government has adapted its existing accounting framework to identify budget expenditures which are poverty-related, and that sub-component which is financed by HIPC relief. Projections indicate that HIPC relief will be directed primarily at increased expenditures on education, health, and rural development. The poverty spending plan will be guided by Sierra Leone's Interim Poverty Reduction Strategy Paper (I-PRSP).
1. Sierra Leone
Poverty and Track Record: 1993-2001
With a per capita GDP of about US$134 in 2000, Sierra Leone's income level is well below the average for sub-Saharan African countries. Even taking into account projected growth rates, and an expected improvement in its terms of trade, Sierra Leone is expected to remain an IDA-only and PRGF-eligible country for the foreseeable future.
Sierra Leone has made substantial progress in implementing economic reforms in recent years despite recurrent disruptions caused by the civil war that lasted until mid-1999. Following a peace agreement reached in mid 1999, the government, with support from multilateral donors, adopted a strong economic rehabilitation and recovery program aimed at sustaining the peace through disarmament, demobilization, and reintegration programs, promoting macroeconomic stability, and implementing key structural reforms. The government's recovery program and peace efforts have been aided by the presence of a United Nations Peace Keeping Force (UNAMSIL) in Sierra Leone since late 1999. Remarkable progress continues to be made on the peace front with the disarmament program for ex-combatants completed in January 2002 and preparations being underway for national elections to be held in mid-May 2002.
Against a backdrop of sustained peace, the economic situation has improved significantly since mid-1999 as the disarmament and reintegration of ex-combatants has gained momentum and private sector confidence has revived. Economic performance in 2000 was excellent with real GDP recovering to 3.8 percent growth in 2000 from -8.1 percent in 1999, and price inflation declining sharply to -0.9 percent from 34.1 percent in 1999. The momentum of economic recovery continued in 2001. Real GDP growth was estimated at 5.4 percent in 2001 slightly above-programmed, and inflation averaged 3 percent compared with the program target of 8 percent. Sierra Leone has also made strong structural reforms in recent years, including tax policy and administration reforms that support private sector redevelopment and fiscal stability, improved public expenditure management and control, exchange and trade liberalization to strengthen competitiveness, financial sector modernization and regulatory reforms, improvements in governance, and more effective delivery of social services.
Steps Required to Reach Completion Point
The full assistance from the IMF and IDA will be delivered to Sierra Leone when the following conditions have been met:
- Continued commitment by Sierra Leone to the financial and economic programs supported by IDA and the IMF's Poverty Reduction and Growth Facility (PRGF).
- Completion of a fully participatory poverty reduction strategy paper, with broad endorsement by the Executive Boards of the IMF and the World Bank. Toward this end, the government has established a detailed plan for participatory PRSP preparation. Preparatory activities for the household expenditure survey are expected to start in early 2002. The survey results will allow for the definition of a poverty line, as well as detailed analysis of the incidence, depth, and severity of poverty. Implementation of the full PRSP for at least one year is expected before the full assistance from the IMF and IDA is granted.
- Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, in the areas of governance and decentralization of government functions, structural measures, education and health.
- 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 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 programs. 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 26 countries under the enhanced HIPC Initiative framework. Sierra Leone joins Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia, for total committed assistance estimated at approximately US$ 40 billion over time, representing an NPV stock-of-debt reduction of about 48 percent on top of traditional debt relief mechanisms.
For more information on HIPC, visit:
1 Net 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 present in the stock of debt. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted, under the HIPC Initiative, at market interest rates. 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.