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Press Release No. 04/82
April 22, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF and the World Bank Support Ethiopia's Completion Point and Approve Topping-Up of Debt Relief Under the Enhanced HIPC Initiative

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) have agreed that Ethiopia has made sufficient progress and taken the necessary steps to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Ethiopia becomes the thirteenth country to reach this point, joining Benin, Bolivia, Burkina Faso, Guyana, Mauritania, Mali, Mozambique, Nicaragua, Niger, Senegal, Tanzania, and Uganda.1

Total debt service relief under the enhanced HIPC Initiative from all of Ethiopia's creditors amounts to approximately US$3.3 billion in nominal terms. This assistance is equivalent to a reduction in net present value (NPV2) terms of US$1.3 billion agreed at the decision point, plus a topping-up of the assistance in an amount equivalent to US$700 million in NPV terms, approved at the completion point. The exceptional additional assistance under the topping up framework has been granted on account of exogenous factors-particularly changes in the discount rate and exchange rate since the decision point-that have fundamentally changed Ethiopia's economic circumstances and thereby adversely affected its debt sustainability, raising the NPV of debt-to-exports ratio at end-2002/03 substantially above the 150 percent threshold established under the enhanced HIPC framework. Further, the track record of the Ethiopian authorities in policy and reform implementation has been strong, and the authorities have borrowed prudently despite being adversely affected by a severe drought and lower coffee prices.

Including topping-up of the HIPC Initiative assistance, multilateral creditors would provide debt relief amounting to about US$1.3 billion in NPV terms, of which US$60.9 million is from the IMF and US$800 million from the World Bank (equivalent to US$1.3 billion in nominal terms). Bilateral and commercial creditors would provide debt relief amounting to US$700 million in NPV terms. In addition, most Paris Club creditors have indicated their intention to provide additional relief beyond the HIPC Initiative (estimated to total about US$300 million in NPV terms).

Resources made available by debt relief under the HIPC initiative are being allocated to pro-poor expenditure programs. In 2001/02 and 2002/03, poverty-targeted spending has increased by US$259 million (3.3 percent of GDP), substantially more than HIPC relief, reflecting the resumption of donor assistance and a reduction in military spending.


Ethiopia is a landlocked country located in the Horn of Africa. With a per capita GDP of about US$100 (one fifth of the sub-Saharan average), Ethiopia is among the poorest countries in the world. Recent national household surveys find 44 percent of the people below the basic needs poverty line.

Following the overthrow of the socialist-oriented Derg regime in 1991, the Ethiopian government has with the support of the Fund and the World Bank been implementing reforms aimed at raising real GDP growth and reducing poverty, while maintaining macroeconomic stability. Real GDP growth averaged about 5 percent per year during 1991/92-2001/02, while inflation has been relatively contained. These positive developments were achieved despite the border war of 1998-2000 with Eritrea, and the continued decline in coffee prices since 1997/98.

Steps Taken to Reach the Completion Point Under the Enhanced HIPC Initiative

The approval of irrevocable debt relief for Ethiopia under the enhanced HIPC Initiative underscores recognition by the international community of its satisfactory progress in implementing sound macroeconomic and structural policies.

Upon reaching its decision point under the enhanced framework of the HIPC Initiative in November 2001, Ethiopia committed to undertake work in the following areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework:

(i) Completion of a full PRSP through a participatory process and its satisfactory implementation for at least one year;

(ii) Preservation of a stable macroeconomic environment; and

(iii) Implementation of key structural reforms and social (particularly health and education) measures.

The HIPC Initiative

In 1996, the International Monetary Fund and the World Bank launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:

· Deeper and broader relief. External debt thresholds were lowered from the original framework. As a result, more countries became eligible for debt relief and some countries became eligible for greater relief.

· Faster relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" fast

· Stronger link between debt relief and poverty reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 27 countries3-two-thirds of the HIPCs-have reached their decision points and are receiving debt relief from all sources that will amount to more than US$51 billion over time, and an average NPV stock-of-debt reduction of nearly two-thirds.

Of these 27, thirteen countries-Benin, Bolivia, Burkina Faso, Ethiopia, Guyana, Mauritania, Mali, Mozambique, Nicaragua, Niger, Senegal, Tanzania and Uganda-have now reached their completion points.


Following the IMF Executive Board's review of Ethiopia, Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Ethiopian authorities have built a sound track record of policy implementation under the Poverty Reduction and Growth Facility (PRGF) since reaching the decision point under the enhanced HIPC Initiative in 2001, as evidenced by the satisfactory conclusion by the Board of the fifth review under the program on February 27, 2004.

"Despite the impact of the recent drought, macroeconomic stability has been maintained. The PRGF-supported program for 2003/04 projects real GDP growth of 6.7 percent, and consumer price inflation is projected to decline to an average of 5.5 percent.

"Ten of the thirteen conditions that were set for reaching the completion point under the HIPC Initiative have been met, and satisfactory progress has been achieved in implementing the remaining conditions relating to improvement in fertilizer markets, the reduction in the repetition rate at the primary school level, and the consolidation of the federal and regional budgets. Taking into account the efforts in these areas, Directors agreed to grant the authorities' request for waivers on the three outstanding completion point triggers and concurred that Ethiopia has met the conditions for reaching the completion point.

"A new debt sustainability analysis (DSA) has been prepared based on end-2002/03 debt data and an updated long-term macroeconomic framework. The DSA shows that even after additional bilateral debt relief, the NPV of Ethiopia's stock of debt is likely to remain above the equivalent of 150 percent of exports until 2022--significantly longer than was envisaged at the decision point.

"Since reaching the decision point, there has been fundamental change in Ethiopia's economic circumstances, with the burden of the external debt increasing due to the impact of the change in exchange rates and lower international discount rates, which reduced the concessionality of Ethiopia's outstanding debt stock and raised debt service obligations in U.S. dollar terms.

"In accordance with the relevant provisions of the HIPC Initiative Trust Instrument, the Executive Board agreed to provide additional assistance beyond that committed at the decision point in the amount of US$707 million in order to reduce Ethiopia's debt-to-export ratio to 150 percent as of the end-2002/03.

"To ensure future debt sustainability, Directors encouraged Ethiopia to continue pursuing a cautious borrowing policy and to persevere in implementing the reform agenda set out in the PRSP. They called on the donor community to provide its full support to Ethiopia's reform efforts, preferably in the form of grants," Mr. Kato said.

1 The completion point under the HIPC Initiative is when creditors commit irrevocably to and fully deliver debt relief. The decision point, which precedes the completion point, is when debt relief is committed and begins on an interim and voluntary basis.
2 The Net Present Value (NPV) of debt is the discounted sum of all future debt-service obligations (interest and principal). It is a measure that takes into account the degree of concessionality of a country's debt stock. 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.
3 Benin, Bolivia, Burkina Faso, Cameroon, Chad, Democratic Republic of Congo (DRC), Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mauritania, Mali, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia.


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