Press Release: World Bank and IMF Support São Tomé and Príncipe's Completion Point under the Enhanced HIPC Initiative and Approve Debt Relief under the Multilateral Debt Relief Initiative
March 16, 2007Press Release No. 07/52
The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed that São Tomé and Príncipe has made good progress to reach the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. São Tomé and Príncipe becomes the 22nd country to reach the completion point under the Initiative.
Debt relief under the Enhanced HIPC Initiative from all of São Tomé and Príncipe's creditors amounts to US$99 million in net present value (NPV) terms as of the Decision Point1. In addition, a topping up of enhanced HIPC assistance was approved in an amount equivalent to US$25 million in NPV terms as of the Completion Point. Total assistance under the Enhanced HIPC Initiative, including topping-up, is estimated to correspond to approximately US$263.46 million in nominal terms.2
The additional assistance under the topping-up framework has been approved by the Boards of the World Bank's IDA and the IMF, as São Tomé and Príncipe's debt sustainability outlook had deteriorated substantially since the Decision Point, primarily due to exogenous factors that have led to fundamental changes in the country's economic circumstances.
In reaching the HIPC completion point, São Tomé and Príncipe also became eligible for further debt relief from the World Bank's IDA, the IMF and the African Development Fund (AfDF) under the Multilateral Debt Relief Initiative (MDRI). Debt service savings under the MDRI would amount to approximately US$50.3 million in nominal terms.
As a result of reaching the HIPC completion point, São Tomé and Príncipe is expected to receive the equivalent of US$314 million in total nominal debt relief under the HIPC Initiative and the MDRI on principal as well as interest payments.
The World Bank's IDA committed itself to providing assistance of US$46 million in nominal terms, of which US$8 million has already been delivered. Moreover, topping-up of IDA's HIPC assistance would amount to approximately US$13 million in nominal terms. Under the MDRI, the World Bank's IDA would cancel a debt stock of approximately US$27 million of debt disbursed before end-2003 and still outstanding on April 1, 2007, corresponding to a total of US$29 million in debt service savings.
The IMF committed itself to providing MDRI and topping up HIPC assistance totaling SDR1.9 million (US$2.8 million) of which topping-up assistance would amount to SDR 0.8 million (US$1.2 million).3 Under the MDRI, the IMF would provide 100 percent debt relief on obligations incurred before end-2004 and still outstanding at the completion point.
To reach the Completion Point, São Tomé and Príncipe met all the triggers aimed at maintaining macroeconomic stability, ensuring commitment to the national poverty strategy, strengthening public expenditure management, raising the quality of education, improving health outcomes and fighting malaria. In addition Sao Tomé and Príncipe took steps to improve governance, especially in its nascent petroleum sector, and fight corruption through an on going comprehensive judicial/administrative reform.
Marie Francoise Marie-Nelly, World Bank Acting Country Director for São Tomé and Príncipe, noted that "reaching the HIPC Completion Point was a key milestone for the country which will have an important development impact as the funds that would have been used for debt servicing could now be deployed for poverty reducing expenditures. In order to achieve optimum results," she added, "São Tomé and Príncipe must continue on the path of macroeconomic stability, improvements in governance, including sustained public finance management reform, and structural reforms to foster private sector development and diversification of the economy."
"São Tomé and Príncipe has made good progress toward securing macroeconomic stability and established a good track record of policy implementation," said Arend Kouwenaar, IMF Mission Chief for São Tomé and Príncipe. "Looking forward, a main challenge will be to develop strong institutions to secure a transparent management of oil revenue and to secure a proper execution of the government's Poverty Reduction Strategy Paper (PRSP) that would strengthen growth in the non-oil economy and support the attainment of the Millennium Development Goals (MDGs)."
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 22 (including São Tomé and Príncipe) have reached the 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 Net present value of debt is the discounted sum of all future debt service obligations (interest and principal).
2 Nominal terms refer to the actual dollar value of debt service forgiven over a period of time.
3 The IMF did not grant assistance under the enhanced HIPC Initiative because there was no debt outstanding to the IMF at the decision point
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.