IMF and World Bank Support Sierra Leone's Completion Point under the Enhanced HIPC Initiative and Approve Debt Relief under the Multilateral Debt Relief InitiativePress Release No. 06/286
December 18, 2006
The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed that Sierra Leone has made sufficient progress to reach the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Sierra Leone becomes the 21st country to reach the completion point under the Initiative.
Debt relief to Sierra Leone under the enhanced HIPC Initiative will amount to US$675.2 million in 2000 net present value (NPV) terms1, equivalent to a revised 81.4 percent2 NPV reduction of Sierra Leone's debt after traditional debt relief. This assistance is estimated to correspond to approximately US$994 million in nominal terms.3
The debt reduction is attributable to multilateral, bilateral, and commercial creditors. The breakdown by main creditors and creditors groups of the Enhanced HIPC Initiative assistance is as follows (in NPV terms):
IMF: US$125.2 million
IDA: US$123.4 million
AfDB: US$43.4 million
Other Multilateral Creditors: US$48.1 million
Bilateral Creditors: US$244.3 million
Commercial Creditors: US$90.8 million
In reaching the HIPC completion point, Sierra Leone also becomes eligible for further debt relief from the IMF, IDA, and the African Development Fund (AfDF) under the Multilateral Debt Relief Initiative (MDRI). Debt relief provided under MDRI will reduce the debt stock by US$556.2 million, in addition to relief received from the three institutions under the HIPC Initiative. MDRI debt relief (net of HIPC assistance) would lead to nominal debt service savings on debt owed to IDA, the IMF and the AfDF of US$609.9 million.
The IMF's debt relief under the MDRI would cover the full stock of debt owed as at the end-2004 that remains outstanding at the completion point. This amounts to US$176 million (equivalent to SDR 117.3 million), of which US$115 million (equivalent to SDR 76.7 million) financed by MDRI and US$61 million (equivalent to SDR 40.6 million) by HIPC. The IMF's MDRI relief will become effective immediately at completion point.
The World Bank's IDA would provide debt relief under the MDRI through a debt stock cancellation of debt disbursed before end-2003 and still outstanding on January 1st, 2007. Debt relief under the MDRI will cancel debt stock owed to IDA amounting to US$326.7 million, in addition to US$173.3 million cancelled as a result of HIPC relief.
Full delivery of debt relief under the HIPC Initiative and the MDRI will significantly reduce Sierra Leone's external public debt. In NPV terms, the stock of debt would be reduced from US$1,197.6 million at end-2005 to US$483.0 million at end-2006 after HIPC relief and to US$110.0 million after MDRI. This assistance is estimated to correspond to approximately US$1,603 million in nominal terms.
To reach the completion point, Sierra Leone met the following conditions: (i) preparation of a full PRSP and implementation for at least one year, as evidenced by the joint staff assessment of the PRSP and the country's annual progress report; (ii) maintenance of macroeconomic stability as evidenced by satisfactory implementation of the PRGF-supported program; (iii) completion of structural measures in the areas of governance and decentralization, private sector development, education and health; and (iv) an increase in spending on designated poverty reducing expenditure priorities that was proportionate to HIPC relief.
"At last Sierra Leone is getting the debt relief that is necessary," said Mats Karlsson, Country Director for Sierra Leone. "US$1.6 billion in nominal terms translates to significant new fiscal space, initially about US$90million a year. The task now is to have high value-for-money public expenditure. Sierra Leone needs effective decentralization and full implementation of the Improved Governance and Accountability Pact. Can Government do it?"
"Sierra Leone has made good progress toward securing macroeconomic stability and established a good track record of policy implementation in 2005 and the first half of 2006," said Norbert Toé, IMF Mission Chief for Sierra Leone. "Looking forward, a key challenge is to sustain high economic growth rates in order to further reduce poverty while maintaining macroeconomic stability and debt sustainability. Meeting this challenge will require maintaining the momentum for structural and governance reforms, including an increased domestic revenue mobilization effort and continued reforms in public expenditure management. Debt relief at completion point under the enhanced HIPC Initiative and MDRI is an important milestone for Sierra Leone toward debt sustainability while providing more resources for poverty reduction and the attainment of the Millennium Development Goals."
The World Bank will continue to deepen its support for growth and poverty reduction in Sierra Leone through its investment projects, technical assistance, budget support and engagement in the policy dialog. Key areas of emphasis include the quality of governance; the level and quality of public service delivery, notably through decentralization; investments in infrastructure; private sector development, both urban and rural; health services; and educational services. For its part, the government is committed to ensure that resources released through debt relief will be applied to programs that promote growth and poverty reduction. This will be achieved in 2007 through the preparation of a supplemental budget and the implementation of new budget procedures that will provide deeper protection for poverty reducing expenditures in the event of any unforeseen resource shortfalls in the future. The government is also committed to the elimination of waste and corruption through a comprehensive program of governance reforms including the Anti-Corruption Commission; implementation of the Government Budgeting and Accountability Act (2005); deepened procurement reforms; and implementation of the principles and criteria set out under the Extractive Industries Transparency Initiative.
The HIPC Initiative
In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens 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 have become eligible for debt relief and some countries have become 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" faster; and
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, 30 HIPC countries have reached their decision points, of which 21 (including Sierra Leone) have reached completion point.
At the July 2005 G8 Summit in Gleneagles, Scotland, G8 leaders pledged to cancel the debt of the world's most indebted countries, most of which are located in Africa. The aim of this Multilateral Debt Relief Initiative (MDRI) was to reduce further the debt of HIPCs and provide additional resource to help them reach the Millennium Development Goals (MDGs)
The MDRI is separate from the HIPC Initiative but linked to it operationally. Under the MDRI, three multilateral institutions - the World Bank's International Development Association, the International Monetary Fund and the African Development Fund provide 100 percent debt relief on eligible debts to countries having reached the HIPC completion point4. Unlike the HIPC Initiative, the MDRI is not comprehensive in its creditor coverage. It does not involve participation of official bilateral or commercial creditors, or of multilateral institutions other than the above mentioned three.
1 The net present value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal).
2 Revised from 80.2 percent as at Decision Point because of upward revision in total NPV debt from US$600 million to US$675 million.
3 Nominal terms refer to the actual dollar value of debt service forgiven over a period of time.
4 The IMF also provided MDRI debt relief to non-HIPCs whose income per capita is below US$380 in order to ensure uniformity of treatment in the use of IMF resources.